[F&M LOGO APPEARS HERE]

                                      F&M
                              NATIONAL CORPORATION

                                 ANNUAL REPORT
                                      1998


<PAGE>

                TABLE OF CONTENTS

Selected Financial Data............................ 1
To Our Owners, Customers,
  Neighbors and Other Friends...................... 2
1998 Highlights.................................... 4
Management's Discussion and
  Analysis of Financial Condition
  and Results of Operations........................ 6
Financial Statements.............................. 27
Notes to Financial Statements..................... 31
Independent Auditor's Report...................... 49
F&m Trust Company................................. 50
Corporate Directors and
  Officers........................................ 51
Directors and Officers of Affiliates.............. 52
Office Locations.................................. 56
Corporate Profile................................. 59
General Information............................... 60

<PAGE>


                                   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                            ---------------------------------------------------------------
                               1998          1997         1996         1995         1994
                            ----------   -----------   ----------   ----------   ----------
<S>                            <C>           <C>          <C>          <C>          <C> 
                                   (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
   Interest income.........   $198,807     $ 190,434     $178,578     $168,576     $148,152
   Interest expense.........    81,832        80,043       75,875       71,667       56,761
                            ----------   -----------   ----------   ----------   ----------
   Net interest income......   116,975       110,391      102,703       96,909       91,391
   Provision for loan losses     4,963         5,802        2,141        2,395        2,786
                            ----------   -----------   ----------   ----------   ----------
   Net interest income after
      provision for loan
      losses                   112,012       104,589      100,562       94,514       88,605
   Noninterest income.......    36,209        26,521       23,602       22,167       21,360
   Securities gains.........     2,428         4,233          314          519          342
   Noninterest expense......    95,107        86,179       77,707       76,638       73,793
                            ----------   -----------   ----------   ----------   ----------
   Income before income taxes   55,542        49,164       46,771       40,562       36,514
   Income taxes.............    19,057        16,360       15,869       13,467       11,031
                            ----------   -----------   ----------   ----------   ----------
   Net income...............   $36,485     $  32,804     $ 30,902     $ 27,095     $ 25,483
                            ==========   ===========   ==========   ==========   ==========
PER SHARE DATA:
   Net income per share,
    basic                     $   1.67       $  1.51     $   1.41     $   1.24     $   1.17
   Net income per share,
    diluted                       1.65          1.50         1.40         1.23         1.15
   Cash dividends ..........      0.76(1)       0.73         0.69         0.61(1)      0.54
   Book value at period end.     13.13         12.10        11.24        10.76         9.68
   Tangible book value......     12.65         11.58        10.96        10.49         9.27
   Average basic shares
     outstanding............    21,884        21,715       21,892       21,822       21,835
   Average diluted shares
     outstanding............    22,084        21,878       22,103       22,096       22,114

BALANCE SHEET DATA:
   Assets...................$2,888,714   $ 2,677,935  $ 2,458,431  $ 2,346,358  $ 2,149,817
   Loans, net of unearned
     income                  1,693,041     1,648,754    1,527,786    1,378,818    1,290,982
   Securities...............   771,689       661,173      629,503      661,670      616,497
   Deposits................. 2,436,022     2,275,380    2,102,931    2,004,037    1,861,900
   Shareholders' equity.....   287,105       264,851      246,052      236,066      207,902

PERFORMANCE RATIOS:
   Return on average assets.      1.32%         1.29%        1.29%        1.22%        1.20%
   Return on average equity.     13.11%        12.97%       12.82%       12.03%       12.37%
   Dividend payout..........     44.84%        45.26%       45.81%       40.29%       37.81%
   Efficiency (1)...........     60.31%        61.60%       60.83%       63.57%       64.68%

ASSET QUALITY RATIOS:
   Allowance for loan losses to
      period end loans, net.       1.30%        1.32%        1.25%        1.40%        1.45%
   Allowance for loan losses to
      nonaccrual loans......     201.12%      111.51%      157.96%       131.62%      89.78%
   Nonperforming assets to
      period end loans and
      foreclosed properties (2)    1.58%        2.14%        1.72%         2.31%       2.93%
   Net charge-offs to average
      loans.................       0.28%        0.20%        0.16%         0.14%       0.09%

CAPITAL AND LIQUIDITY RATIOS:
   Leverage.................       9.90%        9.92%       10.00%        10.12%       9.77%
   Risk-based capital ratios:
      Tier 1 capital........      15.03%       15.03%       15.52%        15.94%      14.83%
      Total capital.........      16.27%       16.28%       16.77%        17.19%      16.06%
   Average loans to average
      deposits..............      70.95%       73.72%       70.88%        68.85%      67.10%
</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
      Peoples Bank of Virginia on April 1, 1998, J. V. Arthur Inc. on April 30,
      1998, Bank of Alexandria on June 1, 1998, FB&T Financial Corporation on
      March 29, 1996, Allegiance Banc Corporation on October 1, 1996, Bank of
      the Potomac on April 6, 1995, PNB Financial Corporation on July 1, 1994
      and Hallmark Bank & Trust on July 1, 1994 and a 2.5% stock dividend
      effective September 1, 1994.
(1) Computed by dividing noninterest expense minus foreclosed property expense
    and amortization of intangibles by the sum of net interest income on a tax
    equivalent basis and noninterest income, net of securities gains or losses.
(2) Nonperforming assets do not include loans past due 90 days accruing
    interest.

                                                                               1
<PAGE>

TO OUR OWNERS,  CUSTOMERS, NEIGHBORS AND OTHER FRIENDS:

[PHOTO OF W.M. FELTNER APPEARS HERE]

W.M. FELTNER

"OUR LEGISLATORS REALLY DO THINK ALL BANKS AND BANKERS ARE FAT CATS AND CAN
STAND A LITTLE MORE COMPETITION."

   Those of you who have followed us over the years will probably remember that
we began this decade by labeling it the "nasty nineties". Since that time,
economic conditions have improved dramatically and the Big Apple has shown
extraordinary growth. 1998 was very special from an operational standpoint with
assets and earnings reaching record heights, yet, despite this our stock price
performed poorly, dropping a little over 5 points during the year at a time when
the stock market was at record levels. So, from that standpoint, we are going to
label the year as nice but nasty.
   Very briefly let's look at the company from an operational standpoint. Assets
exceeded 2 3/4 billion dollars for the first time, ending the year at
$2,889,000,000. Total revenue exceeded $237,000,000, a new all-time high. Net
earnings were $36,485,000, also an all-time high and represented $1.67 per
share. Last year we earned $1.51 per share. Book value at year end was $13.13.
Last year it was $12.10. Return on assets was 1.32 percent, compared to last
year's 1.29 percent and return on equity was 13.11 percent, compared to 1997's
figure of 12.91 percent.
   So with all this improvement, one has to ask why did the stock perform so
poorly? First and foremost, we realized the 1997 year end price of $35.3125 was
unrealistic and brought about by rumors we were being acquired by an
out-of-state bank holding company. Rumors that had no basis or foundation.
Secondly, your board of directors is still on record as wanting to remain
independent. The first reason sent the stock up. The second sent it back down.
Quite frankly, at today's price, the stock is selling at 19 times earnings and
appears to be at or near the industry's norm for bank companies our size.
   The year was a busy one for us from an internal standpoint. Our acquisition
of Peoples Bank of Virginia, Chesterfield, Virginia was completed and merged
into F&M Bank-Richmond. Our acquisition of Bank of Alexandria was completed and
merged into F&M Bank-Northern Virginia. Additionally, we consolidated our three
West Virginia Banks, Keyser, Martinsburg and Ranson, into F&M Bank-West
Virginia. Each of the above have improved, expanded and strengthened our
position in their market area, as well as affording us certain economics in our
operations.
   Also during the year, we were fortunate in having the J.V. Arthur Insurance
Agency join our organization. This acquisition, along with our F&M -Shomo
Lineweaver Insurance Company, will strengthen our insurance operation and afford
us the opportunity to provide a complete line of insurance products to you, our
shareholders, bank customers and the public in general.
   We also increased our ATM network to 174 units, expanded our branch network
to 119 offices and made extraordinary progress in expanding our new trust
company.
   We cannot begin to tell you how much effort and time we have put into
preparation for the Year 2000. Because of that and to assure you that ALL our
banks and affiliates will be ready, we are devoting a special report which you
will find in the 1998 Highlights of this annual report.
   Two years ago, we stated in our annual report to you what a raw deal the
Congress continues to heap upon the banks. Well, 1998 was certainly no
exception. Only this time, they really stuck it to us. We are referring to the
Credit Union Membership Access Act which President Clinton signed into law on
August 7, 1998. Despite the fact a federal appeals court ruled against the
National Credit Union Administration's Multi-group


2

<PAGE>


"SINCE 1994, OF THE 23 FINANCIAL INSTITUTIONS IN THE STATE OF VIRGINIA WITH
DEPOSITS GREATER THAN 400 MILLION, ALL HAVE BEEN SOLD WITH THE EXCEPTION OF
EIGHT."


[PHOTO OF ALFRED B. WHITT APPEARS HERE]

AFRED B. WHITT

Membership Policy and the U.S. Court of Appeals for the District of Columbia
ruled that each federal occupational credit union must share one common bond,
the NCUA appealed to the Supreme Court and LOST. The Supreme Court ruled they
MUST adhere to the sharing of just one common bond. Well, you guessed it, again
our favorite legislators overwhelmingly, almost without any opposition, passed a
law whereby practically anyone can join a credit union and they STILL PAY NO
TAXES. Our legislators really do think all banks and bankers are fat cats and
can stand a little more competition. Believe us when we say, this is just
another nail in the coffin of small banks and that's Nasty!
   While we are on the subject, they still could find no common ground to
relieve banks of the restrictive laws passed back in the 30's. Financial
services reform legislation is just not in the cards for banks. It has been
promised for the last five years. They are long on promises but short on action.
Bankruptcy reform legislation is just another case in point.
   1998 saw the further demise of Virginia's large banks. Most of which have
sold to out-of-state bank holding companies. It is difficult to comprehend that
the F&M is now the second largest financial institution headquartered in the
state. To give you a better idea of what has transpired, let me give you some
facts presented to us by J. P. Morgan. Since 1994, of the 23 financial
institutions in the State of Virginia with deposits greater than 400 million,
all have been sold with the exception of eight. Alarming? I think so! It is no
wonder so many new banks are being organized.
   1998 was another outstanding year for the economy. Lower interest rates,
little inflation and low unemployment brought about another government budget
surplus. Very nice. Hopefully, 1999 will see the continuation of a healthy
economy. Those of us here at the F&M are excited about the prospects for another
record-setting year, despite the uncertainty of corporate profits, stock market
volatility and the general state of political upheaval. Somewhere along the way
it seems that the majority of our politicians have forgotten that the United
States of America should be their first priority. Instead, they are determined
to put party affiliation ahead of everything else. Maybe it is time that all of
us should remind them of this.
   So friends, owners and so forth, another year has come and gone. In fact, we
are now past the first quarter of the last year of the decade of the nineties.
Some of the years have been rather nasty and others have been quite nice. Here's
hoping your (and our) 1999 will be nicer than nice.


Sincerely,


/s/ W.M. Feltner                        /s/ Alfred B. Whitt
W.M. Feltner                            Alfred B. Whitt    
Chairman of the Board                   President          
                                        

"SOMEWHERE ALONG THE WAY IT SEEMS THAT THE MAJORITY OF OUR POLITICIANS HAVE
FORGOTTEN THAT THE UNITED STATES OF AMERICA SHOULD BE THEIR FIRST PRIORITY.
INSTEAD, THEY ARE DETERMINED TO PUT PARTY AFFILIATION HEAD OF EVERYTHING ELSE."

                                                                               3
<PAGE>

1998 HIGHLIGHTS

                                      1998

                                  ACQUISITIONS

   Acquisitions are valuable to F&M in expanding geographically, and in-market
mergers provide additional market share of deposits and opportunities for cost
savings. PEOPLES BANK OF VIRGINIA in Chesterfield increased our F&M
Bank-Richmond's share of the Richmond deposit market by $70 million. Due to an
overlap of branches, we were able to close a branch and create savings
sufficient to avoid any earnings dilution. Our branch network at F&M
Bank-Richmond increased from 10 to 15.
   We had the same opportunity when the BANK OF ALEXANDRIA agreed to join F&M
Bank-Northern Virginia. Approximately $70 million in deposits was added by this
transaction and, once again, savings were realized with the closing of one
branch.
   SECURITY BANK at Manassas has agreed to join F&M's family of banks. Security
Bank will also be merged with F&M Bank-Northern Virginia, increasing our deposit
base by approximately $60 million.
   J.V. ARTHUR, INC., a respected Winchester insurance agency, was acquired by
F&M on May 1, 1998. Our insurance network was expanded by the addition of J.V.
Arthur's three insurance offices.
   F&M now operates a total of 119 bank branches in Virginia, West Virginia and
Maryland, an increase of 10 branches in 1998. ATMs increased by 21 units to 174
units in 1998. F&M also offers mortgage services, insurance, trust, and
financial services through 12 locations.



[PHOTO OF PEOPLES BANK OF VIRGINIA'S MAIN OFFICE IN CHESTERFIELD APPEARS HERE]

[PHOTO OF THE BANK OF ALEXANDRIA'S MAIN OFFICE APPEARS HERE]


                             ORGANIZATIONAL CHANGES

   Our three West Virginia banks, F&M Bank-Blakeley, F&M Bank-Keyser, and F&M
Bank-Martinsburg merged into one bank, F&M BANK-WEST VIRGINIA. This combination
will provide operational savings, but more importantly, will improve and expand
services to all of our West Virginia customers.
   F&M TRUST COMPANY was formed from the trust departments of three banks. The
financial report for this company appears later in this report. Fiduciary
services are available to all shareholders and customers. You should consider
F&M when you need trust administration, estate administration, or employee
benefits administration.
   F&M SERVICES, INC., F&M's data center, was established on July 1, 1998. Its
responsibilities include management of our ATMs, VISA debit cards and data
processing for all affiliate banks and non-banking subsidiaries.


4

<PAGE>

   With a projected increase in earnings for 1999 and F&M's commitment to pay
approximately 45 percent of its income to its shareholders, the outlook for
increased dividends is good. Dividends for 1998 were $0.75 and are projected to
be $0.79 for 1999.
   F&M continues to review our current services and offer new services when
required or requested. In 1999, look for:
   o  Home banking for inquiry and bill paying.
   o  Cash management for business customers.
   o  Electronic telephone voting by shareholders.
   o  Insurance savings for shareholders and customers.
   o  The expansion of trust services throughout F&M's market area.

                                   2000 (Y2K)

   The Board of Directors and Senior Management of F&M made a commitment that
the organization would be Year 2000 ready by March 31, 1999.
   F&M is implementing changes to its information systems so that they will be
fully operable for date recognition and data processing before the year 2000
begins. The Corporation's Year 2000 plans are subject to guidelines promulgated
by the Federal Financial Institutions Examination Council ("FFIEC").
   The Kirchman Corporation has certified F&M's D3000 software Year 2000 ready.
The Kirchman Corporation also received certification from the Information
Technology Association of America ("ITAA") on the Year 2000. ITAA 2000
certification means that the process and methods used by the Kirchman
Corporation meets the information technology industry's best software
development practices for addressing the Year 2000 issue.
   The ITAA, in conjunction with the Software Productivity Consortium, performs
a thorough and complete review of design methods and controls used to provide
Year 2000 compliant software. This independent examination is viewed as a vital
piece of the Year 2000 due diligence practices for software providers.
   It has been estimated that the cost of addressing Year 2000 will be 1.6
percent of 1998 earnings or 0.006 percent of assets, which is immaterial when
considering the size of the Corporation.
   Our projections are necessarily based in part on assumptions of future events
including the continued availability of adequate resources and completion of
third party modification plans. There can be no guarantee that these estimates
will be achieved; actual results could differ from the Corporation's current
estimates. Specific risk factors that might cause material differences include,
but are not limited to, the availability and cost of personnel with adequate
programming skills and the ability to locate and correct all relevant computer
codes. The inability to control the actions and plans of vendors and suppliers,
customers, government entities, and other third parties with respect to Year
2000 issues are associated risks.
   F&M has dedicated technical and managerial support from all levels of the
organization to ensure that it has the necessary resources to complete the Year
2000 compliance plans in accordance with the recommended time frames and,
therefore, expects no interruptions in service.

[PHOTO OF F&M TRUST COMPANY'S HEADQUARTERS IN WINCHESTER APPEARS HERE]

[PHOTO OF F&M-J.V.ARTHUR'S HEADQUARTERS IN WINCHESTER APPEARS HERE]

                                                                               5
<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
     F&M produced record earnings during 1998, performing well in a highly
complex, increasingly competitive business environment. F&M's continued high
asset quality, an excellent interest margin and improved management efficiencies
contributed to record net income of $36.5 million, a return on assets of 1.32%
and a return on equity of 13.11%.
     F&M expanded its operations by announcing mergers with 3 banks and a second
insurance agency in 1998. On April 1, 1998, under terms of the Merger Agreement,
Peoples Bank of Virginia ("PBVA") Chesterfield, Virginia, was merged with F&M
Bank-Richmond and each share of common stock of PBVA outstanding immediately
prior to consummation of the Merger was exchanged, in a tax-free exchange, for
2.58 shares of common stock of F&M with cash being exchanged in lieu of issuing
fractional shares. As of December 31, 1997, PBVA had total assets of $80.4
million, total loans of $47.0 million, total deposits of $70.4 million and total
shareholders' equity of $8.2 million.
     On June 1, 1998, under terms of the Merger Agreement, The Bank of
Alexandria ("BOA") Alexandria, Virginia was merged with F&M Bank-Northern
Virginia and each share of common stock of BOA outstanding immediately prior to
consummation of the Merger was exchanged, in a tax-free exchange, for 0.942
shares of common stock of F&M, with cash being paid in lieu of issuing
fractional shares. As of December 31, 1997, BOA had total assets of $75.9
million, total loans of $58.2 million, total deposits of $67.6 million, and
total shareholders' equity of $7.9 million.
     On April 30, 1998, F&M and J.V. Arthur, Inc. ("JVA") announced an agreement
of affiliation of J. V. Arthur, Inc. with F&M Bank-Winchester, F&M's lead bank.
JVA is an insurance agency located in Winchester, Virginia, which offers a full
line of insurance products.
     On November 10, 1998, F&M and Security Bank Corporation ("Security"),
Manassas, Virginia announced that their respective Boards of Directors have
approved an agreement for the affiliation of Security with F&M. Under the
agreement, Security will merge with F&M's affiliate, F&M Bank-Northern Virginia.
Under terms of the agreement F&M would exchange the number of its shares of
common stock whose aggregate market value determined as of the date of the
closing equals $17.25, giving the transaction an indicated value of
approximately $16.5 million. The transaction is intended to qualify as a
tax-free exchange and be accounted for as a pooling of interests. Security also
granted F&M an option, exercisable under certain circumstances, to acquire
191,300 shares of Security's common stock (subject to adjustment). At December
31, 1998, Security had total assets of $61.2 million, total loans of $34.3
million, deposits of $52.4 million and total shareholders' equity of $7.9
million. The transaction is expected to be completed in the first quarter 1999.
     On January 1, 1998, F&M Trust Company was formed by consolidating the trust
departments of F&M Bank-Winchester, F&M Bank-Peoples and F&M Bank-Northern
Virginia. F&M Trust Company provides a variety of personal trust services
including management of common trust funds, estate administration and planning
specifically addressing the investment and financial management needs of its
customers. At December 31, 1998, F&M Trust Company managed assets and accounts
totaling $586.4 million.
     In 1998, F&M expanded its banking market by 10 branch locations to include
119 branches located in Virginia, West Virginia and Maryland. F&M has 174 ATM
machines strategically located throughout its market area.

RESULTS OF OPERATIONS
     Net income increased 11.2% in 1998 to $36.5 million, compared with $32.8
million earned in 1997 and $30.9 million earned in 1996. Net income per share,
basic, increased to $1.67 per share in 1998 compared to $1.51 and $1.41 per
share for 1997 and 1996. Net income per share, diluted, increased to $1.65 per
share in 1998 compared to $1.50 per share for 1997 and $1.40 per share for 1996.
     Profitability ratios compare favorably in 1998, 1997 and 1996. Return on
average assets on an annualized basis was 1.32% for 1998 and 1.29% for 1997 and
1996. Return on average shareholders' equity is another significant measure of
profitability which in 1998 improved to 13.11%, compared to 12.97% and 12.82%
for 1997 and 1996, respectively. These performance ratios have varied since
1994, with return on average assets increasing slightly from

6
<PAGE>

1.20% in 1994 to 1.22% in 1995, increasing to 1.29% in 1996 and 1997. Return on
average shareholders' equity decreased from 12.37% in 1994 to 12.03% in 1995,
increasing to 12.82% in 1996 and again increasing to 12.97% in 1997.
     Net interest margin represents tax-equivalent net interest income divided
by average earning assets. It reflects the average effective rate earned by F&M
on its average earning assets. In 1998, net interest margin, on a tax-equivalent
basis, was 4.71% compared to 4.82% for 1997 and 4.75% for 1996. 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 1998, the yield on interest-earning
assets decreased 30 basis points from 8.26% in 1997 to 7.96% in 1998 and the
cost of interest-bearing liabilities decreased 10 basis points from 4.24% in
1997 to 4.14% in 1998. The decrease in the yield on earning assets was the
result of lower rates received on loans due to competitive pressures in the
market place. In the later part of 1998, the Federal Reserve cut the prime rate
75 basis points, which reduced the yield on interest rate sensitive loans.
     In 1998, interest-earning assets have increased to $2.629 billion from
$2.435 billion in 1997 and $2.235 billion in 1996. Competition for potential
loan customers have increased to the point that customers are shopping for
rates, consequently, the rate relative to volume of increase in loans has
declined. Loans, net of unearned discount, in 1998 increased $44.3 million to
$1.693 billion as compared to $1.649 billion in 1997 and $1.528 billion in 1996.
     F&M's securities portfolio represents the second largest component of
interest earning assets. At December 31, 1998, F&M's securities portfolio
totaled $771.7 million, $110.5 million or 16.7% higher than year-end 1997. The
securities portfolio at year-end 1997 totaled $661.2 million, which was $31.7
million or 5.0% higher than year-end 1996. In 1998, funds were invested in
investment securities due to the decline in the demand for loan funds and to
take advantage of attractive yields.
     F&M's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense minus foreclosed property expense and
amortization of intangibles and income less securities gains, compares favorably
to other Virginia financial institutions. F&M's efficiency ratio for 1998, 1997
and 1996 was 60.3%, 61.6% and 60.8%, respectively. A lower efficiency ratio
represents a greater control of non-interest related costs. This ratio is
influenced as a result of acquisition and affiliation costs due to F&M's program
of acquiring financial institutions. A fluctuation in the efficiency ratio can
be attributed to relative changes in both non-interest expense and net interest
income.
     Since the beginning of 1988, F&M has acquired approximately $1.362 billion
in assets and $1.181 billion in deposits through fourteen bank acquisitions and
two nonbank acquisitions. Thirteen of these acquisitions were accounted for as a
pooling-of-interests and three 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 counties.
     F&M is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.

               TABLE 1 -- SUMMARY OF FINANCIAL RESULTS BY QUARTER

<TABLE>
<CAPTION>
                                                            1998                                      1997*
                                          ----------------------------------------  ---------------------------------------
                                          DEC. 31   SEPT. 30   JUNE 30   MARCH 31   DEC. 31   SEPT. 30   JUNE 30   MARCH 31
                                          -------   --------   -------   --------   -------   --------   -------   --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                      <C>        <C>        <C>       <C>       <C>        <C>        <C>       <C>     
Interest income..........................$ 49,942   $ 50,165   $ 49,838  $ 48,862  $ 48,847   $ 48,041   $ 47,235  $ 46,311
Interest expense.........................  19,969     20,475     20,755    20,633    20,999     20,253     19,640    19,151
                                          -------   --------   -------   --------   -------   --------   -------   --------
Net interest income......................  29,973     29,690     29,083    28,229    27,848     27,788     27,595    27,160
Provision for loan losses................   2,173      1,410        663       717     3,034        799        873     1,096
                                          -------   --------   -------   --------   -------   --------   -------   --------
Net interest income after provision for
   loan losses                             27,800     28,280     28,420    27,512    24,814     26,989     26,722    26,064
Noninterest income.......................  12,425      8,922      8,770     8,520    10,399      7,840      6,398     6,117
Noninterest expense......................  25,825     23,234     23,624    22,424    23,304     22,377     20,729    19,769
Income before income taxes...............  14,400     13,968     13,566    13,608    11,909     12,452     12,391    12,412
Applicable income taxes..................   4,744      4,820      4,800     4,693     3,644      4,260      4,235     4,221
                                          -------   --------   -------   --------   -------   --------   -------   --------
Net income...............................$  9,656   $  9,148   $  8,766  $  8,915  $  8,265   $  8,192   $  8,156   $ 8,191
                                         ========   ========   ========  ========  ========   ========   ========   =======

Earnings per share, basic................$   0.44   $   0.42   $   0.40  $   0.41  $   0.38   $   0.38   $   0.38   $  0.37

Earnings per share, assuming dilution....$   0.44   $   0.41   $   0.40  $   0.40  $   0.38   $   0.37   $   0.37   $  0.37
</TABLE>

*The amounts previously reported on Form 10Q for the periods presented have been
retroactively restated to reflect the acquisitions of Peoples Bank of Virginia
on April 1, 1998, J. V. Arthur Inc. on April 30, 1998 and The Bank of Alexandria
on June 1, 1998.

                                                                               7
<PAGE>

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 $117.0 million for the year ended December
31, 1998, up 6.0% over the $110.4 million reported for the same period in 1997
and up 7.5% in 1997 over the $102.7 million reported for 1996. Net interest
income in 1998 was affected by increased competition for loans coupled with
declining market rates, however, the economy was considered strong and
expanding. Loans grew $44.3 million or 2.7% to $1.693 billion in 1998 from
$1.649 billion in 1997. Loans increased in 1997 by $121.0 million or 7.9% over
$1.528 billion in 1996. In 1998, deposits provided the source of funds by
increasing to $2.436 billion, up $160.6 million or 7.1% from $2.275 billion in
1997. Interest-bearing deposits increased $61.6 million in 1998 to $1.900
billion from $1.838 billion in 1997. Deposit and loan growth in 1998 was
affected by uncertainty in Far East economic conditions which, in turn, affected
interest rates in banks in the United States. The Federal Reserve lowered the
discount rate in the latter part of 1998 in order to preserve economic
stability. In 1998, depositors were pooling funds in liquid deposit
relationships rather than commit funds to long term relationships.
     Net interest income was $110.4 million for the year 1997, up 7.5% over the
$102.7 million reported for the same period in 1996. Net interest income in 1997
was affected by a rebound of loan demand following a recessionary period. Loans
grew $121.0 million or 7.9% to $1.649 billion in 1997 from $1.528 billion in
1996. In 1997, total interest-bearing deposits provided the primary source of
funds increasing to $1.838 billion, up $94.4 million or 5.4% from $1.744 billion
in 1996.
     Net interest income for 1996 increased $7.7 million to $102.7 million,
compared to $96.9 million for 1995. The net interest margin for 1996 was 4.75%.
At year-end 1996, the securities portfolio was $629.5 million, down $32.1
million or 4.8% over the same period 1995. During 1996, funds were kept in
liquid interest-earning assets to be available when securities yields and loan
demand improved.
     Table 2 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 2 -- VOLUME AND RATE ANALYSIS
                                     TAX EQUIVALENT BASIS

<TABLE>
<CAPTION>
                                                        1998                         1997
                                               -------------------------    ------------------------
                                                                CHANGE IN                   CHANGE IN
                                                VOLUME   RATE    INCOME/     VOLUME   RATE   INCOME/
                                                EFFECT  EFFECT   EXPENSE     EFFECT  EFFECT  EXPENSE
                                               -------- ------- --------    ------- -------- -------
<S>                                             <C>     <C>     <C>         <C>      <C>        <C>   
                                                               (DOLLARS IN THOUSANDS)
EARNING ASSETS:
  Taxable securities..........................  $4,858  $ (713) $ 4,145     $(1,089) $  191     $(898)
  Tax-exempt securities.......................    (315)    (82)    (397)       (284)    (28)     (312)
  Taxable loans...............................   4,695  (3,108)   1,587      13,286    (432)   12,854
  Tax-exempt loans............................     (30)    (35)     (65)        216      (4)      212
  Federal funds sold and repurchase agreements   2,069    (124)   1,945        (178)   (130)     (308)
  Interest-bearing deposits in other banks....     984      12      996         316     (42)      274
                                               -------- ------- --------    ------- -------- --------
       Total earning assets................... $12,261 $(4,050) $ 8,211    $ 12,267  $ (445)  $11,822
                                               -------- ------- --------    ------- -------- --------
INTEREST-BEARING LIABILITIES:
  Checking deposits...........................  $1,295 $   (33) $ 1,262    $    722  $    31  $   753
  Savings deposits - regular..................     (37)   (280)    (317)       (174)    (144)    (318)
  Savings deposits - money market.............     288     (95)     193         (65)     241      176
  CD's & other time deposits - under $100,000.    (457)   (147)    (604)      1,375     (381)     994
  CD's & other time deposits - $100,000 & over     839    (316)     523       1,281      (18)   1,263
                                               -------- ------- --------    ------- -------- --------
       Total interest-bearing deposits........   1,928    (871)   1,057       3,139     (271)   2,868
       Borrowed funds short-term..............     557     107      664         583      209      792
       Borrowed funds long-term...............     159     (91)      68         509       (1)     508
                                               -------- ------- --------    ------- -------- --------
       Total interest-bearing liabilities.....   2,644    (855)   1,789       4,231      (63)   4,168
                                               -------- ------- --------    ------- -------- --------
       Change in net interest income..........  $9,617 $(3,195) $ 6,422     $ 8,036  $  (382) $ 7,654
                                               ======== ======= ========    =======  ======== =======
</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.

8

<PAGE>

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

INTEREST SENSITIVITY
     The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating-rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
     The goal of F&M is to generally maintain a position that is to provide
flexibility enough to move to an equality between rate-sensitive assets and
rate-sensitive liabilities, which may be desirable when there are wide and
frequent fluctuations in interest rates. Interest rate gaps are managed through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year time frame occurs, maturities can be extended by selling
shorter-term investments and buying longer maturities. The same effect can also
be accomplished by reducing emphasis on variable rate loans. When an
unacceptable negative gap occurs, variable rate loans can be increased and more
investment in shorter-term investments can be made. Pricing policies on either
or both loans and deposits can be changed to accomplish any of the goals. F&M
reviews the interest sensitivity position of each subsidiary bank at least once
a quarter.
     It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. F&M considers derivatives as speculative which is contrary
to F&M's historical or prospective philosophy. F&M does not hold or issue
financial instruments for trading purposes. F&M does hold in its loan and
security portfolio investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability management. Off-balance sheet risks such as commitments to
extend credit, standby letters of credit and other items are discussed in Note
18 in the Notes to Consolidated Financial Statements.

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

MARKET RISK MANAGEMENT
     Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. F&M's market risk is composed primarily of interest rate
risk. F&M's Asset/Liability/Risk Committee ("ALCO") is responsible for reviewing
the interest rate sensitivity position of F&M and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by ALCO
are reviewed by F&M's Board of Directors.
     ASSET/LIABILITY/RISK MANAGEMENT: The primary goals of asset/liability/risk
management are to maximize net interest income and the net value of F&M's future
cash flows within the interest rate risk limits set by ALCO.
     INTEREST RATE RISK MEASUREMENT: Interest rate risk is monitored through the
use of three complementary measures: static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
     STATIC GAP: Gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specified time period. The
cumulative one-year gap, at year-end 1998 and 1997, was -4.7% and -12.2% of
total earning assets, respectively. The policy limit for the one-year gap is
plus or minus 15% of adjusted total earning assets.
     Core deposits and loans with noncontractual maturities are included in the
gap repricing distributions based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
     The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-

                                                                               9
<PAGE>

      TABLE 3 -- AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)

<TABLE>
<CAPTION>
                                                         Twelve Months Ended December 31,
-----------------------------------------------------------------------------------------      
                                                                        1998
                                                                                 ANNUAL
                                                              AVERAGE   INCOME/  YIELD/
                                                              BALANCE   EXPENSE   RATE
                                                              -------   -------   ----
<S>                                                         <C>        <C>         <C>  
ASSETS                                                          (DOLLARS IN THOUSANDS)
Securities:
    Taxable...............................................  $679,856   $41,709     6.13%
    Tax-exempt (1)........................................    24,556     2,046     8.33%
-----------------------------------------------------------------------------------------
        Total securities..................................   704,412    43,755     6.21%

Loans (net of unearned income):

    Taxable...............................................  1,641,288   147,140    8.96%
    Tax-exempt (1)........................................    14,473     1,518    10.49%
-----------------------------------------------------------------------------------------
        Total loans.......................................  1,655,761   148,658    8.98%

Federal funds sold and repurchase agreements..............   121,062     6,120     5.06%
Interest-bearing deposits in other banks..................    31,216     1,521     4.87%
-----------------------------------------------------------------------------------------
        Total earning assets..............................  2,512,451   200,054    7.96%

Less: allowance for loan losses...........................   (22,171)
Total nonearning assets...................................   267,523
                                                          -----------
        Total assets......................................$ 2,757,803
                                                          ===========

LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits:
    Checking..............................................$  396,097   $ 8,735     2.21%
    Regular savings.......................................   208,282     5,491     2.64%
    Money market  savings.................................   243,070     7,323     3.01%
    Certificates of deposit:
        Less than $100,000................................   794,970    43,739     5.50%
        $100,000 and more.................................   216,158    11,616     5.37%
-----------------------------------------------------------------------------------------
Total interest-bearing deposits...........................  1,858,577   76,904     4.14%

Short-term borrowings.....................................   101,455     3,825     3.77%

Long-term borrowings......................................    18,469     1,103     5.97%
-----------------------------------------------------------------------------------------
        Total interest-bearing liabilities................  1,978,501   81,832     4.14%

Noninterest-bearing liabilities:

    Demand deposits.......................................   475,272

    Other liabilities.....................................    25,628
                                                          -----------
Total liabilities.........................................  2,479,401
Stockholders' equity......................................    278,402
                                                          -----------
Total liabilities and shareholders` equity................$ 2,757,803
                                                          ===========

Net interest income.......................................             $118,222
                                                                       --------

Interest rate spread......................................                         3.82%

Interest expense as a percent of average earning assets...                         3.26%

Net interest margin.......................................                         4.71%
</TABLE>

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

10

<PAGE>

                        TWELVE MONTHS ENDED DECEMBER 31,


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------- 
            1997                                                       1996
                      ANNUAL                                                    ANNUAL
   AVERAGE  INCOME/   YIELD/                                 AVERAGE   INCOME/  YIELD/
   BALANCE  EXPENSE    RATE                                  BALANCE   EXPENSE   RATE
   -------  -------    ----                                  -------   -------   ----
    (DOLLARS IN THOUSANDS)                                     (DOLLARS IN THOUSANDS)

<S>        <C>         <C>                                  <C>        <C>        <C>  
 $601,166  $ 37,564    6.25%                                $618,136   $38,462    6.22%
   28,320     2,443    8.63%                                  31,605     2,755    8.72%
---------------------------------------------------------------------------------------
  629,486    40,007    6.36%                                 649,741    41,217    6.34%



 1,586,410    145,553    9.17%                             1,441,886   132,699    9.20%
    14,754      1,583   10.73%                                12,739     1,371   10.76%
----------------------------------------------------------------------------------------
 1,601,164    147,136    9.19%                             1,454,625   134,070    9.22%

    80,006      4,175    5.22%                                83,394     4,483    5.38%
    11,024        525    4.76%                                 4,094       251    6.13%
----------------------------------------------------------------------------------------
 2,321,680    191,843    8.26%                             2,191,854   180,021    8.21%

   (19,647)                                                  (19,413)
   241,661                                                   218,198
----------                                               -----------
$2,543,694                                               $ 2,390,639
==========                                               ===========

  $336,906   $  7,473    2.22%                              $304,314   $ 6,720    2.21%
   209,567      5,808    2.77%                               216,008     6,126    2.84%
   233,777      7,130    3.05%                               235,923     6,954    2.95%

   804,029     44,343    5.52%                               778,793    43,349    5.57%
   200,749     11,093    5.53%                               177,359     9,830    5.54%
----------------------------------------------------------------------------------------
 1,785,028     75,847    4.25%                             1,712,397    72,979    4.26%
 
    86,697      3,161    3.65%                                70,390     2,369    3.37%
 
    15,198      1,035    6.81%                                 7,725       527    6.82%
---------------------------------------------------------------------------------------
 1,886,923     80,043    4.24%                             1,790,512    75,875    4.24%

   383,672                                                   339,827

    20,209                                                    19,283
----------                                               -----------
 2,290,804                                                 2,149,622
   252,890                                                   241,017
----------                                               -----------
$2,543,694                                               $ 2,390,639
==========                                               ===========
             $111,800                                                 $104,146
             --------                                                 --------
                         4.02%                                                    3.97%
 
                         3.45%                                                    3.46%

                         4.82%                                                    4.75%
</TABLE>

                                                                              11
<PAGE>

backed securities in the time frames in which they are expected to be received.
Mortgage prepayments are estimated by applying industry median projections of
prepayment speeds to portfolio segments based on coupon range and loan age.
     EARNINGS SIMULATION: The earnings simulation model forecasts one year net
income under a variety of scenarios that incorporate changes in the absolute
level of interest rates, changes in the shape of the yield curve and changes in
interest rate relationships. Management evaluates the effects on income of
alternative interest rate scenarios against earnings in a stable interest rate
environment. This type of analysis is also most useful in determining the
short-run earnings exposures to changes in customer behavior involving loan
payments and deposit additions and withdrawals.
     The most recent earnings simulation model projects net income would
decrease by approximately 8.1% of stable-rate net income if rates immediately
fall by two hundred basis points over the next year. It projects an increase of
approximately 7.3% if rates rise immediately by two hundred basis points.
Management believes this reflects a liability-sensitive rate risk position for
the one-year horizon. This one-year forecast is within the ALCO guideline of
15.0%.
     This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time, in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by ALCO.
     NET PRESENT VALUE: The Net Present Value ("NPV") of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer term repricing risk and options risk embedded in
the balance sheet.
     At year-end, a 200 basis point immediate increase in rates is estimated to
reduce NPV by 5.1%. Additionally, NPV is projected to increase by 2.2% if rates
fall immediately by 200 basis points. Analysis of the average quarterly change
in the Treasury yield curve over the past ten years indicates that a parallel
curve shift of 200 basis points or more is an event that has less than a .1%
chance of occurrence.
     As with gap analysis and earnings simulation modeling, assumptions about
the timing and variability of balance sheet cash flows are critical in NPV
analysis. Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios. These assumptions are applied consistently across the different rate
risk measures.
     Summary information about interest-rate risk measures are presented below.

                     TABLE 4 -- INTEREST-RATE RISK MEASUREs

                                                 YEAR-END      YEAR-END
                                                   1998          1997  
                                                -----------  ----------
     Static 1-Year Cumulative Gap..................  -4.7%      -12.2% 
     1-Year Net Income Simulation Projection                    
       -200 bp Shock vs Stable Rate................  -8.1%       -3.2% 
       +200 bp Shock vs Stable Rate................   7.3%        2.7% 
     Static Net Present Value Change                       
       -200 bp Shock vs Stable Rate................   2.2%        5.0% 
       +200 bp Shock vs Stable Rate................  -5.1%       -7.8% 
     
     Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, F&M's balance sheet tends to move toward
less liability sensitivity with the passage of time. The earnings simulation
model indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitivity position would be lessened. Purchases of
fixed-rate securities have been made to offset the natural tendency toward a
less liability sensitive interest rate risk position.
     Management expects interest rates will decline less than 1% during 1999 and
believes that the current modest level of liability sensitivity is appropriate.

12

<PAGE>

NONINTEREST INCOME

     Noninterest income for 1998 increased $7.9 million, or 25.6%, over the same
period in 1997. Trust Company income increased $306 thousand or 13.1% from $2.3
million for 1997 to $2.6 million for 1998 as a result of increased fiduciary
activities and the settlement of estates. Service charges on deposit accounts,
the largest single item of noninterest income, increased $2.3 million for 1998,
up 21.5% over the comparable period a year ago as a result of adding additional
services and improving existing deposit services. Credit card fees increased to
$4.2 million for 1998 as compared to $3.7 million for 1997 as a result of
increased card loan volume. Fees for other customer services were $3.3 million
for 1998, which increased $749 thousand or 29.5% from 1997 as a result of
increased marketing of current services and providing new services for
customers. Insurance commissions increased $5.2 million or 161.8% from $3.2
million in 1997 to $8.4 million in 1998 as a result of acquiring Shomo &
Lineweaver Insurance and J V Arthur Inc., two full service insurance companies.
Gains on sale of securities were $2.4 million for 1998 as compared to $4.2
million for 1997. Security gains are realized when market conditions exist that
are favorable to F&M and/or conditions dictate additional liquidity is
desirable. In 1997 and to a lesser extent in 1998, F&M took advantage of
significant stock market gains in other corporate stock and securities held by
the corporation. Other operating income increased to $4.8 million in 1998, up
$619 thousand or 14.8% over 1997. The increase in other operating income was the
result of increased charges for various nondeposit related fees such as
checkbook sales, foreign ATM fees, safe deposit box fees, and loan documentation
fees.

     In 1997, noninterest income increased $6.8 million or 28.6% from $23.9
million in 1996 to $30.8 million. Trust Company income increased $139 thousand
or 6.3% from $2.2 million for 1996 to $2.3 million for 1997 as a result of
additional and increased fiduciary activities. Service charges on deposit
accounts were $10.6 million for 1997, up 10.0% over the previous year. Credit
card fees were $3.7 million and $3.4 million for 1997 and 1996, up $251 thousand
as a result of increased card lending activities. Fees for other customer
services were $2.5 million for 1997, which increased $471 thousand or 22.8% from
1996 as a result of a reduction in loan refinancing activity. Insurance
commissions increased $982 thousand or 44.1% from $2.2 million in 1996 to $3.2
million in 1997 as a result of acquiring Shomo & Lineweaver Insurance Company.
Gains on sale of securities were $4.2 million for 1997 as compared to $314
thousand for 1996. Security gains are realized when market conditions exist that
are favorable to F&M and/or conditions dictate additional liquidity is
desirable. Interest rates were rising in 1996 reducing the appeal to reposition
securities, therefore, security gains were smaller in 1996 than in 1997.

                          TABLE 5 -- NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                  ---------------------------
                                                    1998      1997     1996
                                                  --------  -------  --------
<S>                                                 <C>       <C>      <C> 
                                                     (DOLLARS IN THOUSANDS)
Commissions and fees from fiduciary activities..  $  2,641  $ 2,335   $ 2,196
Service charges on deposit accounts.............    12,895   10,612     9,645
Credit card fees................................     4,193    3,652     3,401
Fees for other customer services................     3,287    2,537     2,066
Insurance commission income.....................     8,397    3,208     2,226
Other operating income..........................     4,796    4,177     4,068
                                                  --------  -------  --------
        Noninterest income......................    36,209   26,521    23,602
Profits on securities available for sale........     2,425    4,217       312
Investment securities gains, net................         3       16         2
                                                  --------  -------  --------
        Total noninterest income................  $ 38,637  $30,754   $23,916
                                                  ========  =======  ========
</TABLE>

NONINTEREST EXPENSE

     Total noninterest expense increased $8.9 million or 10.4%, from $86.2
million in 1997 to $95.1 million in 1998. Salaries and employee benefits
increased $6.5 million or 14.0%, net occupancy expense including furniture and
equipment expense increased $577 thousand or 4.1%, credit card expense increased
$147 thousand or 5.7% and other operating expense increased $1.7 million or
7.4%. Growth in 1998 noninterest expense is attributable to branch bank
expansion and costs associated with handling asset and liability growth.
     For 1997, noninterest expense increased by $8.5 million, or 10.9%, from
$77.7 million in 1996 to $86.2 million in 1997. This increase was primarily due
to a $5.4 million, or 13.2% increase in salary and employee benefits, a $1.3

                                                                              13

<PAGE>

million or 10.1% increase in net occupancy expense including furniture and
equipment expense and a $332 thousand, or 14.9% increase in credit card expense.
Other operating expenses also increased $1.4 million or 6.6% in 1997. The
primary reason for the increases in noninterest expense was costs associated
with acquiring and opening new bank offices and remodeling other banking
offices. Credit card expenses increased as a result of higher card lending
activity coupled with a computer conversion. Other operating expenses increased
as a result of professional fees associated with acquiring new banks and
training and conversion costs associated with converting to a new consolidated
data processing system.

                          TABLE 6 -- NONINTEREST EXPENSE

                                                    YEAR ENDED DECEMBER 31,
                                                 ---------------------------
                                                   1998      1997     1996
                                                 --------  -------  --------
                                                    (DOLLARS IN THOUSANDS)
    Salaries and employee benefits.............  $ 52,997  $46,509   $41,073
    Net occupancy expense of premises..........     8,190    7,378     6,696
    Furniture and equipment expense............     6,318    6,553     5,961
    Deposit insurance..........................       291      255       209
    Credit card expense........................     2,710    2,563     2,231
    Other operating expenses...................    24,601   22,921    21,537
                                                 --------  -------  --------
           Total...............................  $ 95,107  $86,179   $77,707
                                                 ========  =======  ========

INCOME TAXES

     Income tax expense at December 31, 1998 was $19.1 million, up from $16.4
million for 1997 and up from $15.9 million for 1996. The increase in income
taxes is attributable to increased taxable earnings at the federal statutory
income tax rate of 35% and state income taxes levied by West Virginia and
Maryland. This corresponds to an effective tax rate of 34.3%, 33.2% and 34.0%
for the three years ended December 31, 1998, 1997 and 1996, respectively. Note
16 to the Consolidated Financial Statements provide a reconciliation between
income tax expense computed using the federal statutory income tax rate and
F&M's actual income tax expense. Also included in Note 16 to the Consolidated
Financial Statements is information regarding the principal items giving rise to
deferred taxes for each of the three years ended December 31.

LOAN PORTFOLIO
     Loans, net of unearned income, increased to $1.693 billion at December 31,
1998, up $44 million or 2.7% from $1.649 billion at year-end 1997 and up $121
million or 7.9% from $1.528 billion at year end 1996. The loan activity increase
for 1998 is indicative of a highly competitive market coupled with an expanding
economy. 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.
Four of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West Virginia,
F&M Bank-Emporia and F&M Bank-Peoples emphasize consumer lending, with
activities focused primarily on residential real estate and consumer lending.
F&M Bank-Richmond, F&M Bank-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 16.6% of F&M's loan portfolio at December 31, 1998 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 65.2% of total loans at December 31, 1998. The residential mortgage loans
made by F&M's subsidiary banks and F&M Mortgage Services are made only for
single family, owner-occupied residences within their respective market regions.
Residential mortgage loans

14

<PAGE>

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.
     F&M Mortgage Services, F&M Bank-Northern Virginia and F&M Bank-Peoples sell
into the secondary market permanent residential mortgage loans that conform to
GNMA and FNMA underwriting guidelines. These F&M subsidiaries purchase
government insured 1-4 family FHA and VA loans and resell them immediately in
package form. At December 31, 1998, F&M Mortgage Services had $28.2 million in
loans that it had committed to purchase, but had not settled upon.
     F&M's real estate construction portfolio historically has been a relatively
small portion of the total loan portfolio. At December 31, 1998, construction
loans were $101.7 million or 6.0% of the total loan portfolio. Generally, all
construction loans are made to finance owner-occupied properties with permanent
financing commitments in place. F&M's subsidiary banks make a limited number of
loans for acquisition, development and construction of residential real estate.
F&M's construction loans, including its acquisition and development loans,
generally bear a floating rate of interest and mature in one year or less. Loan
underwriting standards for such loans generally limit the loan amount to 75% of
the finished appraised value of the project. As a result of strict underwriting
guidelines, F&M has experienced charge-offs involving residential construction
loans since 1993 of less than one half of 1%.
     Consumer loans were 12.2% of F&M's total loan portfolio at December 31,
1998. F&M 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, 1998
comprised 65.2% of the loan portfolio. Loans secured by commercial real estate
comprised 16.6% of the loan portfolio at December 31, 1998 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (29.0%) (shown in Table 7 under the category of "Non-farm,
non-residential"), multifamily loans (1.8%) and agricultural loans (0.9%). 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 6.0% of total loans
outstanding at December 31, 1998. F&M's net charge-off rate for all loans
secured by real estate was 0.07% of period end loans. This is consistent with
1997 when the charge-off rate for all loans secured by real estate was 0.06% 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 amounted to $384.5 million at December 31,
1998, compared to $339.4 million at December 31, 1997. This decrease in unfunded
loan commitments is due to review by management of available lines and reducing
excessive lines.
     On December 31, 1998, F&M had a concentration of loans in non-farm,
non-residential loans, consisting primarily of commercial loans secured by real
estate of $490.7 million and 1-4 family residential mortgage loans of $509.0
million which were in excess of 10 percent of the total loan portfolio. Because
of the nature of F&M's market, loan collateral is predominately real estate
related.
     A number of economic factors in conjunction with loan activity in 1998
suggest that loan growth in 1999 should continue at a slow pace. At present
there is an inverse relationship with short-term rates being higher than
long-term rates. Interest rates in 1998 were below the floors they reached in
1997 and were attractive to borrowers. New home construction is slowing, but
home sales remain strong due to attractive market rates. Auto sales were up in
1998, and the forecast is for it to be steady in 1999. The economy is continuing
to create new jobs and absorb the unemployment that was created during the
recession and business restructuring in 1997 and 1996. Reports suggest that
borrowers are showing a mixed degree of confidence in the economy. These factors
resulted in a declining loan growth trend in 1998 and this trend is expected to
continue in 1999.

                                                                              15

<PAGE>

                                   TABLE 7 -- LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                           -----------------------------------------------------------
                                              1998         1997       1996         1995       1994
                                           ----------  ----------- ----------- ----------- -----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>         <C>         <C>         <C>      
Commercial, financial and agricultural....  $ 280,714   $ 275,678   $ 238,490   $ 198,219   $ 191,480
Real estate construction..................    101,715      95,310      78,063      67,818      61,912
Real estate mortgage:
    Residential (1-4 family)..............    508,966     509,204     475,374     432,422     406,855
    Home equity lines.....................     59,507      68,991      69,011      70,275      70,852
    Multifamily...........................     30,060      32,860      34,614      27,530      27,800
    Non-farm, non-residential (1).........    490,682     471,352     442,186     399,361     345,079
    Agricultural..........................     15,297      18,516      19,199      17,576      17,511
                                           ----------  ----------- ----------- ----------- -----------
    Real estate subtotal..................  1,104,512   1,100,923   1,040,384     947,164     868,097
Loans to individuals:
    Consumer..............................    187,762     157,457     153,179     148,210     155,554
    Credit card...........................     21,074      23,047      23,389      23,043      19,362
                                           ----------  ----------- ----------- ----------- -----------
    Loans to individuals subtotal.........    208,836     180,504     176,568     171,253     174,916
        Total loans.......................  1,695,777   1,652,415   1,533,505   1,384,454   1,296,405
Less unearned income......................     (2,736)     (3,661)     (5,719)     (6,676)     (6,286)
                                           ----------  ----------- ----------- ----------- -----------
Loans-- net of unearned income............  $1,693,041  $1,648,754  $1,527,786  $1,377,778  $1,290,119
                                           ==========  =========== =========== =========== ===========
</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, 1998
                                             ---------------------
                                             COMMERCIAL,
                                             FINANCIAL AND  REAL ESTATE-
                                             AGRICULTURAL   CONSTRUCTION
                                             -------------  -------------
                                               (DOLLARS IN THOUSANDS)
        Within 1 year.....................     $ 150,586   $  71,071
                                               ---------   ---------
        Variable Rate:
            1 to 5 years..................        25,949       4,768
            After 5 years.................        11,439       7,279
                                               ---------   ---------
            Total.........................     $  37,388   $  12,047
                                               ---------   ---------
        Fixed Rate:
            1 to 5 years..................        80,883      11,609
            After 5 years.................        11,857       6,988
                                               ---------   ---------
            Total.........................     $  92,740   $  18,597
                                               ---------   ---------
            Total Maturities..............     $ 280,714   $ 101,715
                                               =========   =========

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 has an independent loan review team that performs a detailed on-site
review and analysis of each of F&M's subsidiary bank's loan portfolio on at
least an annual basis reviewing 60% to 75% of the total principal amount of each
of F&M's subsidiary bank's loan portfolio. In addition, all lending
relationships involving an adversely classified loan are reviewed. The review
team has the authority to classify any loan it determines is not satisfactorily
classified within F&M's grading system. All classified loans are reviewed at
least quarterly by F&M's senior officers and by the subsidiary banks' board of
directors. All past due and nonaccrual loans are reviewed monthly by the
subsidiary banks' board of directors. As a matter of policy, F&M's subsidiary
banks place loans on nonaccrual status

16

<PAGE>

when management determines that the borrower can no longer service debt
from current cash flows and/or collateral liquidation. This generally occurs
when a loan becomes 90 days past due as to principal and interest. This detailed
management analysis forms the basis for determining the amount needed in the
allowance for loan losses. Although the ratio of the allowance to total loans
and nonaccrual loans may be less than its peers, F&M believes the ratio to be
adequate based on this loan risk review analysis.
     Nonperforming loans decreased $8.4 million from $20.0 million at year-end
1997 to $11.5 million at year-end 1998. In keeping with F&M's conservative
philosophy, the amount provided for the provision for loan losses was $5.0
million after careful analysis of possible losses in the loan portfolio. In
1997, the provision was $5.8 million to make additional provision for one
commercial customer. The nature of loan quality in the portfolio and improved
underwriting standards in 1996 allowed F&M to maintain a lower allowance for
loan losses for that year. The ratio of allowance for loan losses to period end
loans, net for 1998, 1997 and 1996 was 1.30%, 1.32% and 1.25%, respectively. In
1998, F&M included in its loan portfolio $39.0 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
1998, the ratio of allowance for loan losses to period end loans, net would be
1.36%. In 1998, 1997 and 1996, the ratio of allowance for loan losses to
nonaccrual loans were 201.1%, 111.5% and 158.0%, respectively, which is an
indication that the allowance is adequate with respect to nonaccrual loans.
     The allowance is also subject to regulatory examinations and determinations
as to adequacy, which may take into account such factors as the methodology used
to calculate the allowance and the size of the allowance in comparison to peer
companies identified by regulatory agencies. F&M's subsidiary banks are examined
at different times, but the Virginia Bureau of Financial Institutions examined
all Virginia banking subsidiaries, the West Virginia Division of Banking
examined the West Virginia bank subsidiary and the Federal Reserve Bank of
Baltimore examined the Maryland bank subsidiary during 1998. Loans classified
for regulatory purposes as loss, doubtful, substandard, or special mention, do
not represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources or represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
     F&M maintains a general allowance for loan losses and does not allocate its
allowance for loan losses to individual categories for management purposes.
Table 8 shows an allocation among loan categories based upon analysis of the
loan portfolio's composition, historical loan loss experience, and other factors
and the ratio of the related outstanding loan balances to total loans.

               TABLE 8 -- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                   1998                      1997                      1996                      1995           
                         ------------------------  ------------------------  -----------------------   -----------------------  
                                     PERCENT OF                PERCENT OF               PERCENT OF                 PERCENT OF   
                                   LOANS IN EACH             LOANS IN EACH             LOANS IN EACH             LOANS IN EACH  
                                    CATEGORY TO               CATEGORY TO               CATEGORY TO               CATEGORY TO   
                         ALLOWANCE  TOTAL LOANS    ALLOWANCE  TOTAL LOANS    ALLOWANCE  TOTAL LOANS    ALLOWANCE  TOTAL LOANS   
                         ---------  -----------    ---------  -----------    ---------  -----------    ---------  -----------   
<S>                        <C>          <C>          <C>         <C>          <C>          <C>          <C>          <C>        
December 31:                                                                 (DOLLARS IN THOUSANDS)
    Commercial, financial
      and agriculture....  $9,060       16.6%        $8,959      16.7%        $6,677       15.6%        $6,752       14.4%      
    Real estate-
      construction.......     779        6.0            770       5.8            763        4.6            750        4.9       
    Real estate-mortgage    7,210       65.2          7,129      66.6          6,944       68.0          7,022       68.7       
    Consumer.............   4,887       12.2          4,832      10.9          4,693       11.8          4,768       12.0       
                          -------      -----        -------     -----        -------      -----        -------      -----       
                          $21,936      100.0%       $21,690     100.0%       $19,077      100.0%       $19,292      100.0%      
                          =======      =====        =======     =====        =======      =====        =======      =====       
</TABLE>

<TABLE>
<CAPTION>
                                   1994
                         ----------------------
                                     PERCENT OF
                                   LOANS IN EACH
                                    CATEGORY TO
                         ALLOWANCE  TOTAL LOANS
                         ---------  -----------
<S>                        <C>         <C>  
December 31:             
    Commercial, financial
      and agriculture....  $6,653      14.8%
    Real estate-
      construction.......     748       4.8
    Real estate-mortgage    6,803      67.3
    Consumer...........     4,485      13.1
                          -------     ----- 
                          $18,689     100.0%
                          =======     ===== 
</TABLE>

     F&M provided $5.0 million, $5.8 million and $2.1 million for provision for
loan losses for the years 1998, 1997 and 1996, respectively. These charges to
the provision represent management's decision to provide an amount necessary to
achieve a level in the allowance for loan losses to adequately cover possible
losses to the portfolio.
     F&M's net charge-offs increased in 1998 to $4.7 million, higher than the
1997 level of $3.2 million and higher than 1996 net charge-offs of $2.4 million.
The higher net charge-offs in 1998 was due to a few customers inability to
manage their finances and the settlement of a bankruptcy attributable to one
large commercial customer. Commercial, financial and agricultural loans
represented the highest category of net charge-offs in 1998 of $2.0 million
compared to $163 thousand in 1997. Loans to individuals made up of consumer and
credit card loans represented the second highest category of net charge-offs in
1998 of $1.5 million as compared to $1.9 million in 1997. In 1998 and 1997,
personal bankruptcies and credit card losses contributed largely to the
charge-offs in the loans to individuals category. Net charge-offs to average
loans was 0.28%, 0.20% and 0.16% for the years 1998, 1997 and 1996,
respectively.

                                                                              17
<PAGE>

                             TABLE 9 -- ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                   ---------------------------------------------------
                                                     1998      1997       1996       1995       1994
                                                  --------    -------   --------   --------   -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                  <C>       <C>        <C>        <C>        <C> 
Balance, beginning of period.....................  $21,690    $19,077   $ 19,292   $18,689  $  17,073
    Loans charged-off:
        Commercial, financial and agriculture....    2,152        896      1,442       690      1,311
        Real estate construction.................       57        171         20        74         45
        Real estate mortgage:
            Residential (1-4 family).............      478        382        142       583        280
            Home equity lines....................       13         --         27        --         14
            Multifamily..........................       --         --         45        --         --
            Non-farm, non-residential (1)........      911        265         81        95         --
            Agricultural.........................       15        400         --        --         --
                                                  --------    -------   --------   --------   -------
                    Real estate subtotal.........    1,417      1,047        295       678        294
    Consumer.....................................    1,215      1,199        715     1,156        692
    Credit card..................................      630      1,000        541       348        152
                                                  --------    -------   --------   --------   -------
                    Loans to individuals subtotal    1,845      2,199      1,256     1,504        844
                    Total loans charged-off......    5,471      4,313      3,013     2,946      2,494
    Recoveries:
        Commercial, financial and agriculture....      148        733        232       712        837
        Real estate construction.................       30         --         --        --         --
        Real estate mortgage:
            Residential (1-4 family).............       32         24        119        68        125
            Home equity lines....................       --         --         --        56         22
            Multifamily..........................       --         --          3        --         --
            Non-farm, non-residential (1)........       89         36         37        19         4
            Agricultural.........................      120         --         --        --         --
                                                  --------    -------   --------   --------   -------
                    Real estate subtotal.........      241         60        159       143        151
    Loans to individuals:
        Consumer.................................      232        277        238       286        324
        Credit card..............................      103         54         28        13         12
                                                  --------    -------   --------   --------   -------
                    Loans to individuals subtotal      335        331        266       299        336
                    Total recoveries.............      754      1,124        657     1,154      1,324
                                                  --------    -------   --------   --------   -------
Net charge-offs..................................    4,717      3,189      2,356     1,792      1,170
Provision for loan losses........................    4,963      5,802      2,141     2,395      2,786
                                                  --------    -------   --------   --------   -------
Balance, end of period...........................  $21,936    $21,690   $ 19,077   $19,292  $  18,689
                                                  ========    =======   ========   ========   =======
Ratio of allowance for loan losses to loans
  outstanding at end of period...................     1.30%      1.32%      1.25%    1.40%      1.45%
Ratio of net charge-offs to average loans
  outstanding during period......................     0.28%      0.20%      0.16%    0.14%      0.09%
</TABLE>

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

     The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1998, 1997 and 1996
was $804 thousand, $216 thousand and $769 thousand, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $1.1 million in 1998, $1.7 million in 1997 and $1.5 million in
1996.
     NONPERFORMING ASSETS. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $27.0
million, $35.6 million, and $26.6 million at year-end 1998, 1997 and 1996,
respectively. The decrease in nonperforming assets in 1998 was due to a
reduction in nonaccrual loans. F&M management exerts great effort to identify
deteriorating assets early in the business cycle to ensure that prompt action is
taken while working toward final resolution of all nonperforming assets.
     Nonperforming loans (nonaccrual loans and restructured loans) at December
31, 1998 were $11.5 million, or 0.7% of total loans, down from $20.0 million, or
1.2% of total loans at December 31, 1997 and down from $12.3 million, or 0.8% of
total loans, at December 31, 1996. Nonperforming loans at year-end 1998 were
composed of $7.7 million secured by real estate, $3.2 million commercial and
industrial loans and loans to individuals for household, family, and other
personal expenditures amounting to $591 thousand. Nonperforming loans that were
guaranteed by the U.S. government were $907 thousand in 1998.

18

<PAGE>

     Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. Nonperforming loans
decreased 42.3% during 1998, while they increased 61.9% in 1997. The increase in
nonperforming loans in 1997 was primarily due to the inclusion of loans made to
one commercial customer for $6.6 million. In 1998, the customer filed for
bankruptcy and was liquidated. The amount provided in the reserve for loan
losses was more than adequate to absorb the loss.
     The recorded investment in certain loans that were considered to be
impaired was $11.0 million at year-end 1998 as compared to $14.5 million at
year-end 1997, of which $7.3 million was classified as nonperforming. Included
in 1998, impaired loans are $7.2 million secured by commercial real estate. All
impaired loans at year-end 1998 and 1997 had a related valuation allowance
totaling $2.3 million and $4.0 million. The average recorded investment in
certain impaired loans for the years ended December 31, 1998 and December 31,
1997 was approximately $13.9 million and $10.2 million, respectively. For the
years 1998 and 1997, interest income recognized on impaired loans totaled $804
thousand and $216 thousand, all of which was recognized on a cash basis.
     Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $3.5 million and $6.4 million at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income would
have approximated $482 thousand and $320 thousand for 1998 and 1997,
respectively.
     Foreclosed properties consists of 30 parcels of real estate acquired
through debt previously contracted. These properties consist primarily of
commercial and residential real estate whose value is determined through sale at
public auction or fair market value, whichever is less. In 1995, F&M acquired
through foreclosure approximately 1,000 acres of real estate located in
Jefferson County, West Virginia, valued in excess of $4 million. F&M is
marketing this property and will dispose of it as expediently as possible. At
December 31, 1997, F&M had $13.2 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.

                               TABLE 10 -- NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                            -----------------------------------------------------------
                                               1998         1997        1996         1995       1994
                                            ----------  ----------- ----------- ----------- -----------
<S>                                            <C>          <C>         <C>          <C>        <C> 
                                                              (DOLLARS IN THOUSANDS)
Nonaccrual loans..........................   $  10,907    $  19,452    $  12,077   $  14,657   $  20,816
Restructured loans........................         625          523          259         487         731
Foreclosed property.......................      15,401       15,663       14,243      16,668      16,804
                                            ----------   ----------- ----------- ----------- -----------
        Total nonperforming assets.........  $  26,933    $  35,638    $  26,579   $  31,812   $  38,351
                                             ==========  =========== =========== =========== ===========

Loans past due 90 days accruing interest..   $   1,990    $   2,930    $   4,785   $   3,828   $   2,158
Allowance for loan losses to period end loans     1.30%        1.32%       1.25%       1.40%       1.45%
Allowance for loan losses to nonaccrual loans   201.12%      111.51%     157.96%     131.62%      89.78%
Nonperforming assets to period end loans and
  foreclosed properties...................        1.58%        2.14%       1.72%       2.31%       2.93%
Net charge-offs to average loans..........        0.28%        0.20%       0.16%       0.14%       0.09%

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

                                                                   DECEMBER 31,
                                            -----------------------------------------------------------
                                               1998         1997       1996         1995       1994
                                            ----------  ----------- ----------- ----------- -----------
                                                              (DOLLARS IN THOUSANDS)
Income that would have been recorded in
  accordance with original terms:
    Nonaccrual loans and restructured loans  $   1,112   $   1,680   $   1,549   $   1,343   $   1,444
Income actually recorded:
    Nonaccrual and restructured loans......        804         216         769         229         159
</TABLE>

     On December 31, 1998, 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, 1998, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $2.0 million, compared to $2.9 million and $4.8 million at year end 1997
and 1996, respectively.

                                                                              19

<PAGE>

     POTENTIAL PROBLEM LOANS. At December 31, 1998, potential problem loans were
approximately $14.5 million, including 4 lending relationships with principal
balances in excess of $500,000, which had an aggregate principal balance
outstanding of $3.6 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, 1998 are generally secured by residential and commercial real
estate with appraised values that exceed the principal balance.
     Although trends for credit quality factors, such as loan losses and
non-performing assets, continue to improve, it is likely that F&M will continue
modest provisions for loan losses in 1999. 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 1999 should not be
materially greater than those in 1998. At such relatively low levels of loan
losses as were experienced in 1998, however, a minor dollar fluctuation in
losses could represent a large percentage increase. Loan loss expectations for
1999 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 1999.
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 $771.7 million at December
31, 1998, compared to $661.2 million at December 31, 1997. The securities
portfolio increased $110.5 million in 1998 over 1997, which followed an increase
of $31.7 million in 1997 over 1996. Investment in U.S. Government securities
increased $116.4 million, or 19.0%, for the year 1998. For the year 1997, U.S.
Government securities increased $37.9 million, or 6.6%. Investment in states and
political subdivisions remained at relatively low levels. F&M has generally not
reinvested funds in securities issued by states and political subdivisions,
because those securities do not have the same tax benefits that they have had in
prior years.
     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 market value. Securities available
for sale include securities that may be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, general liquidity needs and other similar factors.
     Financial Accounting Standards Board Pronouncement No. 115 effective
January 1, 1994, required F&M to show the effect of market changes in the value
of securities available for sale (AFS). The market value of AFS securities at
December 31, 1998 was $372.5 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 Shareholders' Equity as unrealized gain of $6.0 million
and $2.2 million at December 31, 1998 and December 31, 1997, respectively.
Investment rates have decreased in 1998 and 1997, thereby, causing currently
held bond portfolio market values to increase. In 1996, 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
18 in the Notes to Consolidated Financial Statements.

       TABLE 11 -- INVESTMENT PORTFOLIO AND SECURITIES AVAILABLE FOR SALE

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                       ---------------------------
                                                         1998      1997     1996
                                                       --------  -------  --------
<S>                                                      <C>       <C>      <C> 
                                                          (DOLLARS IN THOUSANDS)

     U.S. Government securities......................  $375,378 $375,858  $301,630
     States and political subdivisions...............    22,860   29,273    30,350
     Other securities and corporate securities.......       970    1,576     1,881
                                                       --------  -------  --------
             Total investment securities.............  $399,208 $406,707  $333,861
                                                       ========  =======  ========
</TABLE>

20

<PAGE>

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                       ---------------------------
                                                         1998      1997     1996
                                                       --------  -------  --------
                                                          (DOLLARS IN THOUSANDS)

<S>                                                    <C>       <C>       <C>     
     U.S. Government securities......................  $354,155  $237,285  $273,591
     States and political subdivisions...............     1,179    1,846     2,697
     Other securities and corporate securities.......    17,147   15,335    19,355
                                                       --------  -------  --------
             Total securities available for sale.....  $372,481  $254,466  $295,643
                                                       ========  =======  ========
</TABLE>

                  TABLE 12 -- MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
                                      DECEMBER 31, 1998
                                   TAXABLE-EQUIVALENT BASIS


<TABLE>
<CAPTION>
                                                                 DUE AFTER 1            DUE AFTER 5        
                                     DUE IN 1 YEAR                THROUGH 5              THROUGH 10        
                                        OR LESS                     YEARS                   YEARS          
                                --------------------     ---------------------     --------------------    
                                  AMOUNT       YIELD         AMOUNT      YIELD       AMOUNT       YIELD    
                                  ------       -----         ------      -----       ------       -----    
                                                                             (DOLLARS IN THOUSANDS)
Securities held for investment:
<S>                             <C>            <C>       <C>             <C>       <C>            <C>      
    U.S. Government securities  $   32,645     6.19%     $   266,318     5.98%     $   69,360     6.61%    
  Other taxable securities             200     9.75%             512     7.90%            258     5.70%    
                                  --------     ----         --------     ----      ----------     ----     
      Total taxable.....            32,845     6.21%         266,830     5.98%         69,618     6.61%    
  Tax-exempt securities (1)          2,867     7.23%          11,862     7.43%          6,253     7.82%    
                                  --------     ----         --------     ----      ----------     ----     
      Total ............           $35,712     6.29%        $278,692     6.05%     $   75,871     6.71%    
                                  --------     ----         --------     ----      ----------     ----     
Securities held for sale:
  U.S. Government securities    $   79,238     6.12%     $   129,079     6.12%     $   85,924     6.25%    
  Other taxable securities             450     8.00%              --     0.00%             --     0.00%    
                                  --------     ----         --------     ----      ----------     ----     
      Total taxable.....           $79,688     6.13%         129,079     6.12%         85,924     6.25%    
                                  --------     ----         --------     ----      ----------     ----     
  Tax-exempt securities (1)             --     0.00%              --     0.00%          1,179     6.59%    
      Total.............           $79,688     6.13%        $129,079     6.12%     $   87,103     6.25%    
                                  --------     ----         --------     ----      ----------     ----     
Total securities........          $115,400     6.18%        $407,771     6.07%     $  162,974     6.47%    
                                  ========     ====         ========     ====      ==========     ====     
</TABLE>

<TABLE>
<CAPTION>
                                     DUE AFTER 10
                                       YEARS AND
                                   EQUITY SECURITIES           TOTAL
                                  -------------------  -------------------
                                   AMOUNT       YIELD    AMOUNT      YIELD
                                   ------       -----    ------      -----
                                
Securities held for investment:
<S>                               <C>           <C>     <C>          <C>  
    U.S. Government securities    $   7,055     7.40%   $375,378     6.09%
  Other taxable securities               --     0.00%        970     7.71%
                                  ---------     ----    --------     ---- 
      Total taxable.....              7,055     7.40%    376,348     6.09%
  Tax-exempt securities (1)           1,878     8.41%     22,860     7.60%
                                  ---------     ----    --------     ---- 
      Total ............          $   8,933     7.61%   $399,208     6.18%
                                  ---------     ----    --------     ---- 
Securities held for sale:
  U.S. Government securities      $  59,914     6.65%   $354,155     6.23%
  Other taxable securities           16,697     6.12%     17,147     6.17%
                                  ---------     ----    --------     ---- 
      Total taxable.....             76,611     6.53%    371,302     6.23%
                                  ---------     ----    --------     ---- 
  Tax-exempt securities (1)              --     0.00%      1,179     6.59%
      Total.............          $  76,611     6.53%   $372,481     6.23%
                                  ---------     ----    --------     ---- 
Total securities........          $  85,544     6.65%   $771,689     6.20%
                                  =========     ====    ========     ==== 
</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, 1998
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, 1998 increased $160.6 million or 7.1% to $2.436
billion from $2.275 billion at year-end 1997. Non-interest bearing demand
deposits increased $99.0 million or 22.7% from $437.2 million in 1997 to $536.2
million in 1998. Interest bearing deposits increased $61.6 million or 3.4% to
$1.900 billion in 1998. In 1998, savings deposits including interest checking
increased $76.6 million or 13.3% to $651.1 million, while money market deposits
increased $10.2 million. Certificates of deposit over $100,000 experienced a
$26.6 million or 12.4% increase in deposits. Certificates of deposit under
$100,000 declined $51.8 million or 6.4% from $812.6 million at year-end 1997 to
$760.8 million at year-end 1998. Depositors have pooled funds in liquid deposits
such a non-interest bearing deposits and savings in order to have the
flexibility to move balances into investments that yield a higher rate of
return.
     F&M does not have any other time deposits, other than certificates of
deposits, that are over $100,000.
     Deposits at December 31, 1997 grew $172.4 million or 8.2% to $2.275 billion
from $2.102 billion at year-end 1997. Non-interest bearing demand deposits
increased $78.1 million or 21.7% from $359.1 million in 1996 to $437.2 million
in 1997. Interest bearing deposits increased $94.4 million or 5.4% to $1.838
billion in 1997. Interest checking,

                                                                              21

<PAGE>

savings deposits, and money market deposits experienced a reduction in deposits
in 1997, whereas, certificates of deposit over and under $100,000 experienced an
increase in deposits. Deposit growth in 1997 was affected by comparatively low
interest rates and the consequent movement of funds out of deposit accounts and
into alternative investments. In addition to moving funds out of deposit
accounts, depositors continued to shift funds into more liquid accounts.


                              TABLE 13 -- DEPOSITS AND RATES PAID

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                              ---------------------------------------------------------------------------
                                       1998                      1997                      1996
                              ---------------------     ----------------------     ----------------------
                                AMOUNT       RATE         AMOUNT       RATE         AMOUNT       RATE
                              ---------   ---------     ----------  ----------     ---------   ----------
<S>                              <C>          <C>         <C>          <C>           <C>          <C>  
                                                     (DOLLARS IN THOUSANDS)
Noninterest-bearing accounts  $  536,243                 $437,208                   $359,128
                              ----------                 --------                   --------
Interest-bearing accounts:
    Interest checking.....       439,150      2.21%       368,128      2.22%         321,982      2.21%
    Regular savings.......       211,960      2.64%       206,212      2.77%         213,725      2.84%
    Money-market..........       245,748      3.01%       235,567      3.05%         238,856      2.95%
        Time deposits:
            Less than $100,000   760,781      5.50%       812,569      5.52%         781,257      5.57%
            $100,000  and more   242,140      5.37%       215,496      5.53%         187,984      5.54%
                               ---------      -----     ---------      -----      ----------      -----
Total interest-bearing....     1,899,779      4.14%     1,837,972      4.25%       1,743,804      4.26%
                               ---------      -----     ---------      -----      ----------      -----
        Total.............    $2,436,022               $2,275,180                 $2,102,932
                              ==========               ==========                 ==========  
</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>         <C>        <C>          <C>         <C>        <C>            <C>  
At December 31, 1998  $  28,553   $ 39,527   $  99,260    $  74,800   $    --    $  242,140     9.94%
</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 6.0%
must be Tier I capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. A
"Well Capitalized" bank will have a Tier 1 capital ratio of at least 6% and a
Total Capital ratio of at least 10%. F&M had a Tier I capital of 15.0% and a
Total Capital ratio of 16.3% at December 31, 1998, far exceeding the capital
requirements adopted by the Federal bank regulatory agencies.
     Table 14 reflects the cash dividends per share declared during each quarter
of the periods indicated. The information in Table 14 may vary for certain
periods from the dividends paid during the quarter in cases where the dividend
was paid in the quarter following its declaration. In addition, the amounts
shown have not been restated and adjusted to reflect the acquisitions of Peoples
Bank of Virginia, Bank of Alexandria, and J.V. Arthur Inc.

22

<PAGE>

                      TABLE 14 -- COMMON STOCK PERFORMANCE AND DIVIDENDS

<TABLE>
<CAPTION>
                                              COMMON STOCK PRICE
                                ---------------------------------------------
                                        1998                    1997             DIVIDENDS DECLARED
                                                                               -----------------------
                                  HIGH         LOW         HIGH        LOW         1998       1997
                                ---------  ----------  ----------- ----------- ----------- -----------
<S>                             <C>         <C>         <C>         <C>         <C>         <C>      
First quarter................   $   36.25   $   31.75   $   22.88   $   19.63   $   0.185   $   0.180
Second quarter...............   $   34.31   $   32.00   $   26.38   $   19.88   $   0.185   $   0.180
Third quarter................   $   31.56   $   26.13   $   30.44   $   26.00   $   0.195   $   0.185
Fourth quarter...............   $   31.69   $   25.06   $   36.25   $   28.56   $   0.195   $   0.185

Years ended December 31......   $   36.25   $   25.06   $   36.25   $   19.63   $   0.760   $   0.730
</TABLE>

F&M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1998 there were approximately 8,182
shareholders of record.

                                TABLE 15 -- ANALYSIS OF CAPITAL

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                        --------------------------------
                                                          1998        1997        1996
                                                        --------    -------     --------
<S>                                                       <C>         <C>         <C> 
                                                           (DOLLARS IN THOUSANDS)
      Tier 1 Capital:
          Common stock................................  $ 43,743     $43,779  $   43,770
          Additional paid in capital..................    76,404      77,989      78,969
          Retained earnings...........................   160,980     140,853     122,897
          Less: Goodwill..............................    10,090      11,208       7,249
                                                        --------     -------    --------
          Total Tier 1 capital........................   271,037     251,413     238,387

      Tier 2 Capital:
          Allowance for loan losses...................    21,936      20,906      19,077
          Add: 45% of unrealized equity securities....       433          --          --
                                                        --------     -------    --------
          Total Tier 2 capital........................    22,369      20,906      19,077
          Total risk-based capital....................  $293,406  $  272,319  $  257,464
                                                        ========     =======    ========       
      Risk-weighted assets........................... $1,803,320  $1,672,473  $1,535,557

      CAPITAL RATIOS:
          Tier 1 risk-based capital ratio.............     15.03%      15.03%      15.52%
          Total risk-based capital ratio..............     16.27%      16.28%      16.77%
          Tier 1 capital to average total assets......      9.90%       9.92%      10.00%
</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, 1998, approximately $934.5 million or 35.5% 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

                                                                              23
<PAGE>

institutions totaling in excess of $59.2 million, of which none was
borrowed at December 31, 1998. Federal funds borrowed by F&M's subsidiary banks
during 1998 averaged less than $500,000. At December 31, 1998, certain of F&M's
subsidiary banks had outstanding $102.9 million of borrowings pursuant to
securities repurchase agreement transactions, ranging in maturity from one day
to three months. Also, F&M has credit lines totaling $364.9 million from the
Federal Home Loan Bank that can be utilized for short and/or long-term
borrowing.
     F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 1998, F&M had $17.3 million outstanding in short-term
obligations issued to selected customers of F&M's subsidiary banks pursuant to
master note agreements. As a back-up source of funds, F&M has approved bank
lines of credit totaling $9.0 million. These lines are used infrequently with
the average aggregate balance outstanding under the lines not exceeding $1.0
million since they have been in place. At year end 1998, 1997 and 1996, there
were no outstanding balances under these lines of credit.
     All F&M's banks are members of the Federal Home Loan Bank system except two
banks, which do not qualify. F&M's FHLB member banks joined the 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 1998, long-term borrowings from the Federal Home Loan Bank system for
RHFA investments were $21.1 million maturing through 2006.

ACCOUNTING RULE CHANGES
     In 1997, the FASB issued FASB No. 131, "Disclosures about Segments of an
Enterprise and Related Information." FASB No. 131 establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
became effective in 1998. The Corporation does not have any segments that meet
the disclosure requirements under this statement.
     In October 1998, the FASB issued Statement No 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." FASB Statement No. 65, as amended, requires that, after securitization
of a mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. This Statement further amends Statement No. 65 to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
This Statement is effective beginning in 1999.

YEAR 2000 (Y2K)
THE PROBLEM
     The impact the century date change will have on date-sensitive computer
programs worldwide is one of the biggest challenges ever faced by the business
world. On older computers, memory and storage space were limited and expensive.
In most cases, only the last two digits of the year (99) were used, with the
century (19) being implied. At the turn of the century, some computers may
recognize the year "00" as 1900 instead of 2000, causing problems ranging from
minor inaccuracies to systems failures. F&M is committed to achieving Year 2000
readiness well in advance of the millennium change. It is F&M's goal to continue
to deliver uninterrupted and unparalleled service into the 21st century and
beyond.
     In 1998, F&M has estimated that costs of addressing Year 2000 issues was
1.6% of 1998 earnings (or 0.02% of assets), which was immaterial when
considering the size of the Corporation. Year 2000 costs in 1999 and 2000 are
also expected to be immaterial. The projections of total costs of F&M's Year
2000 project and the expected completion dates are based on F&M's best
estimates, which are necessarily based in part on assumptions of future events

24

<PAGE>

including the continued availability of adequate resources and completion
of third party modification plans. There can be no guarantee that these
estimates will be achieved; actual results could differ from the Corporation's
current estimates. Specific risk factors that might cause material differences
include, but are not limited to, the availability and cost of personnel with
adequate programming skills and the ability to locate and correct all relevant
computer codes. The inability to control the actions and plans of vendors and
suppliers, customers, government entities, and other third parties with respect
to Year 2000 issues are associated risks.
     F&M has long recognized that the Year 2000 issue is a multifaceted one.
Corporate management and technical teams have been working steadily on all
related aspects of business that could be affected. F&M has been scrutinized by
regulatory authorities to ensure that it is proceeding with a prudent plan of
action for year 2000 readiness and are keeping its customers informed.

YEAR 2000 PROJECT PHASES
     In 1997, F&M and its affiliates began to develop a comprehensive plan to
ensure that the Corporation would be ready for the millennium change. This plan
encompassed five phases:

PHASE I -- ORGANIZATIONAL AWARENESS
     The Year 2000 Task Force will make certain that the strategic importance of
Year 2000 as a business objective is understood by the Board of Directors,
senior management, officers, and employees of all affiliates.

PHASE II -- ASSESSING ACTIONS AND DEVELOPING DETAILED PLANS
     The Year 2000 Task Force will create a detailed inventory covering
centralized and decentralized hardware, software, and networks, as well as
equipment with embedded computer chips and logic. The inventory can include
items such as HVAC systems, vaults, security equipment, and elevators.

PHASE III -- RENOVATING SYSTEMS, APPLICATIONS, AND EQUIPMENT
     During this phase, the necessary upgrade of operating system applications,
hardware, and equipment take place. In addition, contingency plans are developed
identifying alternate approaches if renovations of current software, hardware
and equipment lag behind or fail after January 1, 2000.

PHASE IV -- VALIDATING THE RENOVATIONS THROUGH TESTING
     In this phase, F&M will develop and coordinate detailed test schedules with
correspondents, vendors, and customers to ensure Year 2000 preparedness. This
phase is critical and encompasses both corrected applications and those
applications already determined to be compliant.

PHASE V -- IMPLEMENTATION
     Implementation requires careful planning to make sure that interrelated
applications are coordinated as to when they go into production. This phase also
includes monitoring of systems throughout 1999 and into 2000 to ensure date
functions and interdependencies work properly.

"MISSION CRITICAL" SYSTEM TESTING
     F&M's "mission critical" system was developed from initial design and
tested in 1998 as Year 2000 ready by its vendor, Kirchman Corporation. In
addition, the Kirchman Corporation received Year 2000 Certification from the
ITAA (Information Technology Association of America) during 1998. Foresight and
commitment to serving F&M's customers has, in many ways, kept F&M one step ahead
of the Year 2000 issue.
     F&M made great strides on this project during 1998 and are continuing to do
so in 1999. Test plans have been completed, testing strategies have been
developed, and a second phase of testing has begun. F&M has installed its own
separate certification test environment to ensure that F&M will have the ability
to roll into 2000 without impact. F&M is running multiple compliance tests to
affirm that all applications interface properly under future-date simulated
conditions. F&M expects to complete Phase I through Phase IV testing in the
first quarter of 1999.
     F&M places a high priority on the service provided to customers, and is
working diligently to ensure the continued operation of essential business
functions. The Corporation is on schedule and confident that F&M will make a
smooth transition into the Year 2000.

CONTINGENCY PLANS
     Simultaneous to the testing of its mission critical system, F&M will
prepare alternate solutions through a business resumption contingency plan to
mitigate potential risks on January 1, 2000. This contingency plan will be
developed for all core business functions and their supporting information
technology systems and will include



<PAGE>

                                                                              25

trigger dates for implementation of alternative solutions. Core business
risks will be prioritized based upon greatest risk posed to the institution. The
contingency plans will identify financial and human resources necessary for
their execution. In addition, it will contain a business risk assessment that
identifies potential disruptions on the bank's operations, the minimum
acceptable level of services, the strategies and resources available to restore
system or business operations, and the processes and equipment needed for the
institution to function at an adequate level.
     The risk of failure is not limited to F&M's internal information system.
The institution depends on data provided by its business partners, correspondent
banks, Federal Reserve Bank, and other third parties. F&M also depends on
vendors from which telecommunications, software, and other services are
provided. Finally, F&M depends on services provided by the public infrastructure
including power, water, transportation, and voice and data telecommunications.
F&M's contingency plans address these concerns and provide for alternate
solutions should Year 2000-related infrastructure problems develop, ensuring
that our institution can operate at an acceptable level.

WORST-CASE YEAR 2000 SCENARIOS
     Until the Year 2000 event actually occurs and for a period of time
thereafter, there can be no assurance that there will be no problems related to
Year 2000. The Year 2000 technology challenge is an unprecedented event. If Year
2000 issues are not adequately addressed by the Corporation and third parties,
the Corporation could face, among other things, business disruptions,
operational problems, financial losses, legal liability and similar risks, and
the Corporation's business, results of operations and financial position could
be materially adversely affected.
     The Corporation's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Corporation's problem loans and credit losses in future
years. In addition, the Corporation may be subject to increased liquidity risks
associated with deposit withdrawals. It is not, however, possible to quantify
the potential impact of any such risks or losses at this time.

FDIC INSURANCE
     FDIC-insured deposits are completely safe. FDIC insurance is a constant, a
given, a guarantee you can literally bank on. If a bank were to experience Year
2000 problems and, in the worse case, were unable to operate, the FDIC will be
there to protect insured deposits, as it has been for all 65 years of the FDIC's
existence. No depositor has ever lost a cent of insured funds at an FDIC-insured
bank or savings institution.
     "First and foremost, the FDIC wants consumers to know that insured deposits
are safe, and that deposit insurance will not be affected by the century date
change," says Sandy Cormenetz, the Y2K Project Manager for the FDIC's Legal
Division in Washington. "We also want people to know as much as possible about
the Year 2000 problem -- to know what it is, and what it is not. That way people
can separate accurate information from scare stories." (Source: FDIC CONSUMER
NEWS, Fall 1998)
     The foregoing Year 2000 discussion contains "forward-looking statement"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including, without limitation, anticipated costs, the dates by which
the Corporation expects to complete remediation and testing of systems and
contingency planning, and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third-party vendors and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of Year 2000
testing; adequate resolution of Year 2000 issues by governmental agencies,
businesses or other third parties that are service providers, suppliers,
borrowers or customers of the Corporation; unanticipated system costs; the need
to replace hardware; the adequacy of and ability to implement contingency plans;
and similar uncertainties. The forward-looking statements made in the foregoing
Year 2000 discussion speak only as of the date of which such statements are
made, and the Corporation undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or reflect the occurrence of unanticipated events.
     The foregoing Year 2000 discussion constitutes a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Readiness and Disclosure Act of
1998.

26

<PAGE>

                          F&M NATIONAL CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED BALANCE SHEETS
                                  December 31, 1998 and 1997
                            (In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
                                                                             1998            1997
                                                                         ------------   -------------
<S>                                                                      <C>             <C>         
ASSETS
 Cash and due from banks..............................................   $    160,839    $    132,138
 Interest-bearing deposits in other banks.............................         38,820          11,843
  Federal funds sold and securities purchased under
    agreements to resell..............................................        109,930         113,077
  Securities (fair value 1998, $777,274; 1997, $667,752)..............        771,689         661,173
  Loans...............................................................      1,695,777       1,652,415
  Unearned income.....................................................         (2,736)        (3,661)
                                                                         ------------   -------------
              Loans (net of unearned income)..........................   $  1,693,041    $  1,648,754
    Allowance for loan losses.........................................        (21,936)       (21,690)
                                                                         ------------   -------------
              Net loans...............................................   $  1,671,105    $  1,627,064
  Bank premises and equipment, net....................................         65,155          60,958
  Other assets........................................................         71,176          71,682
                                                                         ------------   -------------
              Total assets............................................   $  2,888,714    $  2,677,935
                                                                         ============   =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
 Deposits:
    Noninterest-bearing demand deposits...............................   $    536,243    $    437,208
    Savings and interest-bearing demand deposits......................        896,858         810,107
    Time deposits.....................................................      1,002,921       1,028,065
                                                                         ------------   -------------
              Total deposits..........................................   $  2,436,022    $  2,275,380
  Federal funds purchased and securities sold under
    agreements to repurchase..........................................        102,935          81,336
  Other short-term borrowings.........................................         17,312          14,509
  Long-term debt......................................................         21,058          17,136
  Other liabilities...................................................         24,282          24,723
  Commitments and contingent liabilities..............................             --              --
                                                                         ------------   -------------
              Total liabilities.......................................   $  2,601,609    $  2,413,084
                                                                         ------------   -------------
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 1998, 21,871,674 shares; issued 1997, 21,889,500 shares....         43,743          43,779
  Capital surplus.....................................................         76,404          77,989
  Retained earnings...................................................        160,980         140,853
  Accumulated other comprehensive income..............................          5,978           2,230
                                                                         ------------   -------------
              Total shareholders' equity..............................   $    287,105    $    264,851
                                                                         ------------   -------------
              Total liabilities and shareholders' equity..............   $  2,888,714    $  2,677,935
                                                                         ============   =============
</TABLE>

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

                                                                              27
<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
        For Each of the Three Years in the Period Ended December 31, 1998
                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                              1998           1997            1996
                                                         -------------   ------------   -------------
<S>                                                           <C>            <C>             <C> 
INTEREST INCOME
 Interest and fees on loans............................   $    148,127   $    146,582    $    133,591
  Interest and dividends on investment securities:
    Taxable interest income............................         24,102         20,656          19,077
    Interest income exempt from federal income taxes...          1,277          1,518           1,716
  Interest and dividends on securities available for sale:
    Taxable interest income............................         16,735         16,136          18,790
    Interest income exempt from federal income taxes...             53             71              75
    Dividends..........................................            872            771             595
  Interest income on federal funds sold and securities
    purchased under agreements to resell...............          6,120          4,175           4,483
  Interest on deposits in banks........................          1,521            525             251
                                                         -------------   ------------   -------------
                     Total interest income.............   $    198,807   $    190,434    $    178,578
                                                         -------------   ------------   -------------
INTEREST EXPENSE
 Interest on deposits .................................   $     76,904   $     75,847    $     72,979
  Interest on short-term borrowings....................          3,825          3,161           2,369
  Interest on long-term debt...........................          1,103          1,035             527
                                                         -------------   ------------   -------------
                     Total interest expense............   $     81,832   $     80,043    $     75,875
                                                         -------------   ------------   -------------
                     Net interest income...............   $    116,975   $    110,391    $    102,703

  Provision for loan losses............................          4,963          5,802           2,141
                                                         -------------   ------------   -------------
                     Net interest income after provision
                        for loan losses................   $    112,012   $    104,589    $    100,562
                                                         -------------   ------------   -------------
OTHER INCOME
 Commissions and fees from fiduciary activities........   $      2,641   $      2,335    $      2,196
  Service charges on deposit accounts..................         12,895         10,612           9,645
  Credit card fees.....................................          4,193          3,652           3,401
  Fees for other customer services.....................          3,287          2,537           2,066
  Insurance commissions................................          8,397          3,208           2,226
  Other operating income...............................          4,796          4,177           4,068
  Profits on securities available for sale.............          2,425          4,217             312
  Investment securities gains, net.....................              3             16               2
                                                         -------------   ------------   -------------
                     Total other income................   $     38,637   $     30,754    $     23,916
                                                         -------------   ------------   -------------
OTHER EXPENSES
 Salaries and employees' benefits......................   $     52,997   $     46,509    $     41,073
  Net occupancy expense of premises....................          8,190          7,378           6,696
  Furniture and equipment expenses.....................          6,318          6,553           5,961
  Credit card expense..................................          2,710          2,563           2,231
  Other operating expenses.............................         24,892         23,176          21,746
                                                         -------------   ------------   -------------
                     Total other expenses..............   $     95,107   $     86,179    $     77,707
                                                         -------------   ------------   -------------
                     Income before income taxes........   $     55,542   $     49,164    $     46,771

Income tax expense.....................................         19,057         16,360          15,869
                                                         -------------   ------------   -------------
                     Net income........................   $     36,485   $     32,804    $     30,902
                                                         =============   ============   =============
EARNINGS PER COMMON SHARE, basic.......................   $       1.67   $       1.51    $       1.41
                                                         =============   ============   =============

EARNINGS PER COMMON SHARE, assuming dilution...........   $       1.65   $       1.50    $       1.40
                                                         =============   ============   =============
</TABLE>

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

28

<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, 1998
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                       ACCUMULATED
                                                                          OTHER
                                                                         COMPRE-    COMPRE-
                                       COMMON     CAPITAL   RETAINED     HENSIVE    HENSIVE
                                        STOCK     SURPLUS    EARNINGS    INCOME     INCOME       TOTAL
                                     ---------   ---------  ---------  ---------  ---------   ---------
<S>                                  <C>        <C>         <C>        <C>        <C>         <C>      
BALANCE, DECEMBER 31, 1995.......... $  43,871  $   82,488  $ 106,154  $   3,553              $ 236,066
 Comprehensive income:
  Net income-- 1996.................        --          --     30,902         --  $  30,902      30,902
  Other comprehensive income net of tax:
    Unrealized holding (losses) arising
      during the period (net of tax,
      $1,580).......................        --          --         --         --     (2,934)         --
    Reclassification adjustment (net of
      tax, $109)....................        --          --         --         --       (203)         --
                                                                                  ---------
    Other comprehensive income
      (net of tax, $1,689)..........        --          --         --     (3,137) $  (3,137)    (3,137)
                                                                                  ---------

    Total comprehensive income......        --          --         --         --  $  27,765          --
                                                                                  =========
 Cash dividends declared............        --          --   (14,159)         --               (14,159)
 Acquisition of common stock
    (410,000 shares)................      (821)    (6,635)         --         --                (7,456)
 Issuance of common stock-benefit plans
    (360,000 shares)................       720       3,116         --         --                  3,836
                                     ---------   ---------  ---------  ---------              ---------

BALANCE, DECEMBER 31, 1996.......... $  43,770  $   78,969  $ 122,897  $     416              $ 246,052
 Comprehensive income:
  Net income-- 1997.................        --          --     32,804         --  $  32,804      32,804
  Other comprehensive income net of tax:
    Unrealized holding gains arising
     during the period (net of tax,
     $2,453)........................        --          --         --         --      4,555          --
    Reclassification adjustment (net of
      tax, $1,476)..................        --          --         --         --     (2,741)         --
                                                                                  ---------
    Other comprehensive income
      (net of tax, $977)............        --          --         --      1,814  $   1,814      1,814
                                                                                  ---------

    Total comprehensive income......        --          --         --         --  $  34,618          --
                                                                                  =========
 Cash dividends declared............        --          --   (14,848)         --               (14,848)
 Acquisition of common stock
  (440,000 shares)..................      (883)    (9,711)         --         --               (10,594)
 Issuance of common stock-benefit plans
  (180,000 shares)..................       360       2,966         --         --                  3,326
 Issuance of common stock in exchange for
  net assets in acquisition (266,000
  shares)...........................       532       5,765         --         --                  6,297
                                     ---------   ---------  ---------  ---------              ---------

BALANCE, DECEMBER 31, 1997.......... $  43,779  $   77,989  $ 140,853  $   2,230              $ 264,851
 Comprehensive income:
  Net income-- 1998.................        --          --     36,485         --  $  36,485      36,485
  Other comprehensive income net of tax:
    Unrealized holding gains arising
      during the period (net of tax,
      $2,811)........................       --          --         --         --      5,324          --
    Reclassification adjustment (net of
      tax, $849)....................        --          --         --         --     (1,576)         --
                                                                                  ---------
    Other comprehensive income
      (net of tax, $1,962)..........        --          --         --      3,748  $   3,748      3,748
                                                                                  ---------

    Total comprehensive income......        --          --         --         --  $  40,233          --
                                                                                  =========
 Cash dividends declared............        --          --   (16,358)         --               (16,358)
 Acquisition of common stock
  (188,000 shares)..................      (376)    (5,733)         --         --                (6,109)
 Issuance of common stock-benefit plans
  (170,000 shares)..................       340       4,148         --         --                  4,488
                                     ---------   ---------  ---------  ---------              ---------

BALANCE, DECEMBER 31, 1998.......... $  43,743  $   76,404  $ 160,980  $   5,978              $ 287,105
                                     =========  ==========  =========  =========              =========
</TABLE>

See Notes to Consolidated Financial Statements.

                                                                              29
<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For Each of the Three Years in the Period Ended December 31, 1998
                                 (In Thousands)
                                                                      
<TABLE>
<CAPTION>
                                                         --------------------------------------------
                                                              1998           1997            1996
                                                         -------------   ------------   -------------
<S>                                                           <C>            <C>             <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income............................................   $     36,485   $     32,804    $     30,902
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization....................          5,750          5,899           5,153
      Provision for loan losses........................          4,963          5,802           2,141
      Deferred income taxes (credits)..................            497          1,509            (69)
      Profits on securities available for sale.........        (2,425)         (4,217)          (312)
      Investment securities gains, net.................            (3)            (16)            (2)
      (Gain) loss on sale of other real estate.........           (99)             90           (121)
      Net amortization and accretion of securities.....             41           (109)            238
      Increase in other assets.........................        (1,239)         (5,145)        (2,055)
      Increase (decrease) in other liabilities.........          (943)         (1,878)          1,047
                                                         -------------   ------------   -------------
           Net cash provided by operating activities      $    43,027    $     38,495    $     36,922
                                                         -------------   ------------   -------------
CASH FLOWS FROM INVESTING ACTIVITIES
  (Increase) in interest-bearing deposits in other banks  $   (26,977)   $     (4,113)   $     (5,569)
  Proceeds from sales, principal repayments and calls of
    securities available for sale .....................       145,710          71,864          55,368
  Proceeds from maturities of securities available for sale    48,460          51,451          37,082
  Proceeds from principal repayments and calls of
    investment securities..............................       127,750          52,714          13,935
  Proceeds from maturities of investment securities....        75,646          61,389          96,915
  Purchase of securities available for sale............      (250,351)        (74,898)       (101,209)
  Purchase of investment securities....................      (249,634)       (186,946)        (74,737)
  (Increase) decrease in federal funds sold and
    securities purchased under agreements to resell....         3,147         (36,927)         25,261
  Net (increase) in loans..............................       (53,974)       (128,521)       (153,870)
  Purchases of bank premises and equipment.............        (8,784)        (15,656)        (11,086)
  Proceeds from sale of other real estate..............         4,721           2,497           5,052
  Cash acquired in acquisition.........................            --             529              --
                                                         -------------   ------------   -------------
           Net cash (used in) investing activities        $  (184,286)    $  (206,617)   $   (112,858)
                                                         -------------   ------------   -------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase in noninterest-bearing and interest-
    bearing demand deposits and savings accounts.......   $   185,786     $   113,682    $     36,734
  Net increase (decrease) in certificates of deposit...       (25,144)         58,925          62,472
  Dividends paid.......................................       (15,856)        (15,762)       (12,102)
  Increase (decrease) in federal funds purchased and
    securities sold under agreements to repurchase.....        21,599          28,059         (5,935)
  Increase (decrease) in other short-term borrowings...         2,803            (367)        (3,663)
  Net proceeds from issuance and sale of common stock..         2,959           2,594          3,336
  Acquisition of common stock..........................        (6,109)        (10,594)        (7,456)
  Increase (decrease) in Federal Home Loan Bank advances           --          (8,297)         2,560
  Proceeds from long-term debt.........................         9,900           8,500          8,775
  Principal payments on long-term debt.................        (5,978)         (2,861)        (1,503)
                                                         -------------   ------------   -------------
           Net cash provided by financing activities       $  169,960     $   173,879    $    83,218
                                                         -------------   ------------   -------------
           Increase in cash and cash equivalents           $   28,701     $     5,757    $     7,282

CASH AND CASH EQUIVALENTS
 Beginning.............................................       132,138         126,381        119,099
                                                         -------------   ------------   -------------
  Ending...............................................    $  160,839     $   132,138    $   126,381
                                                         =============   ============   =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash payments for:
    Interest ..........................................    $   82,174     $    79,003    $    75,476
                                                         =============   ============   =============

    Income taxes.......................................    $   18,949     $    17,412    $    14,953
                                                         =============   ============   =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
  Issuance of stock options under nonvariable
   compensatory plan                                       $    1,529     $       732    $       500
                                                         =============   ============   =============

  Loan balances transferred to foreclosed properties...    $    4,970     $     4,504    $     2,419
                                                         =============   ============   =============
  Unrealized gain (loss) on securities available for
    sale                                                   $    5,710     $     2,791    $    (4,826)
                                                         =============   ============   =============
  Issuance of common stock in exchange for net assets
    in acquisition                                         $       --     $     6,297    $        --
                                                         =============   ============   =============
</TABLE>
---------------
See Notes to Consolidated Financial Statements.

30

<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        For Each of the Three Years in the Period Ended December 31, 1998

NOTE 1 -- NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
     F&M National Corporation is a bank holding company whose principal banking
subsidiaries provide a wide range of financial services, including a variety of
deposit accounts, as well as commercial, consumer and mortgage lending to
customers in Virginia, West Virginia and Maryland. In addition to commercial
activities, the Corporation operates insurance and trust companies which
generate noninterest income by sales of insurance, trust and fiduciary services.
     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
     Securities are classified in three categories and are accounted for as
follows:

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

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

     c. Trading Securities
     Trading securities, which are generally held for the short term in
     anticipation of market gains, are carried at fair value. Realized and
     unrealized gains and losses on trading account assets are included in
     interest income on trading account securities. The Corporation had no
     trading securities at December 31, 1998 and 1997.

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

                                                                              31
<PAGE>

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

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

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

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

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

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

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

EARNINGS PER SHARE
     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share

32

<PAGE>

amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.

TRUST DIVISION
     Securities and other property held by the F&M Trust Company in a fiduciary
or agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.

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

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

CASH AND CASH EQUIVALENTS
     For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.

COMPREHENSIVE INCOME
     As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Corporation's net income or shareholders' equity. The statement requires other
comprehensive income to include unrealized gain or loss on securities available
for sale adjustments, which prior to adoption were reported separately in
shareholders' equity. The financial statements have been reclassified to conform
to the requirements of SFAS No. 130.

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
     As of October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Statement 133 establishes accounting and reporting
standards for derivative financial instruments and other similar financial
instruments and for hedging activities. The Statement also allowed securities
classified as held to maturity to be transferred to the available for sale
category at the date of initial application of this standard. The Corporation
does not have any derivative instruments and hedging activities as defined under
this Statement.

NOTE 2 -- SECURITIES

     The amortized cost and fair values of securities being held to maturity as
of December 31, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1998
                                          -----------------------------------------------------------
                                                              GROSS          GROSS
                                            AMORTIZED      UNREALIZED     UNREALIZED         FAIR
                                              COST            GAINS        (LOSSES)          VALUE
                                          ------------   -------------   ------------   -------------
<S>                                          <C>           <C>            <C>           <C>         
U.S. Treasury securities and obligations of                     (In Thousands)
  U.S. government corporations and agencies  $   375,378   $    6,064     $   (1,122)   $    380,320
Obligations of states and political
  subdivisions...........................         22,860          623            (27)         23,456
Corporate securities.....................            970           47             --           1,017
                                            ------------   ----------     ----------   -------------
                                             $   399,208   $    6,734     $   (1,149)   $    404,793
                                            ============   ==========     ==========   =============
</TABLE>

                                                                              33
<PAGE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1997
                                          -----------------------------------------------------------
                                                              GROSS          GROSS
                                            AMORTIZED      UNREALIZED     UNREALIZED         FAIR
                                              COST            GAINS        (LOSSES)          VALUE
                                          ------------   -------------   ------------   -------------
<S>                                          <C>           <C>            <C>           <C>       
U.S. Treasury securities and obligations of                     (In Thousands)
  U.S. government corporations and agencies  $   375,858   $    6,494     $   (596)     $  381,756
Obligations of states and political
  subdivisions...........................         29,273          668          (60)         29,881
Corporate securities.....................            976           49           --           1,025
Mortgage-backed securities...............            600           24           --             624
                                            ------------   ----------   ----------      ----------
                                             $   406,707    $   7,235     $   (656)     $  413,286
                                            ============   ==========   ==========      ==========
</TABLE>

     The amortized cost and fair value of securities being held to maturity as
of December 31, 1998, 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.

                                                     AMORTIZED         FAIR
                                                       COST            VALUE
                                                   ------------   -------------
                                                          (In Thousands)
      Due in one year or less...................   $     35,712    $     35,969
      Due after one year through five years.....        278,692         281,908
      Due after five years through ten years....         75,871          76,556
      Due after ten years.......................          7,963           9,343
      Corporate securities......................            970           1,017
                                                   ------------   -------------
                                                   $    399,208    $    404,793
                                                   ============   =============

     The amortized cost and fair value of securities available for sale as of
December 31, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1998
                                          -----------------------------------------------------------
                                                              GROSS          GROSS
                                            AMORTIZED      UNREALIZED     UNREALIZED         FAIR
                                              COST            GAINS        (LOSSES)          VALUE
                                          ------------   -------------   ------------   -------------
<S>                                         <C>          <C>             <C>             <C>         
                                                                 (In Thousands)
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies $  345,753   $       9,055   $       (653)   $    354,155
Obligations of states and political
  subdivisions...........................        1,135              44             --           1,179
Corporate securities.....................        4,897             564             --           5,461
Other....................................       11,286             400             --          11,686
                                          ------------   -------------   ------------   -------------
                                            $  363,071    $     10,063   $       (653)   $    372,481
                                          ============   =============   ============   =============

                                                               DECEMBER 31, 1997
                                          -----------------------------------------------------------
                                                              GROSS          GROSS
                                            AMORTIZED      UNREALIZED     UNREALIZED         FAIR
                                              COST            GAINS        (LOSSES)          VALUE
                                          ------------   -------------   ------------   -------------
                                                                 (In Thousands)
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies  $ 235,502    $      2,165   $       (382)   $    237,285
Obligations of states and political
  subdivisions...........................        1,841               8             (3)          1,846
Corporate securities.....................        3,951           1,748             (1)          5,698
Other....................................        9,454             183             --           9,637
                                          ------------   -------------   ------------   -------------
                                          $    250,748    $      4,104   $       (386)   $    254,466
                                          ============   =============   ============   =============
</TABLE>

34

<PAGE>

     The amortized cost and fair value of securities available for sale, as of
December 31, 1998 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
                                                  ------------   -------------
                                                           (In Thousands)
      Due in one year or less...................  $     79,212    $     79,688
      Due after one year through five years.....       126,830         129,079
      Due after five years through ten years....        86,025          87,103
      Due after ten years.......................        54,818          59,464
      Corporate securities......................         4,897           5,461
      Other.....................................        11,289          11,686
                                                  ------------   -------------
                                                  $    363,071    $    372,481
                                                  ============   =============

     Proceeds from principal repayments and calls of securities held to maturity
during 1998, 1997 and 1996 were $127,750,000, $52,714,000 and $13,935,000. Gross
gains of $3,000, $20,000 and $5,000 and gross losses of $-0-, $4,000 and $3,000
were realized on those principal repayments and calls during 1998, 1997 and
1996, respectively. There were no sales of securities held to maturity during
1998, 1997 and 1996.

     Proceeds from sales, principal repayments and calls of securities available
for sale during 1998, 1997 and 1996 were $145,710,000, $71,864,000 and
$55,368,000. Gross gains of $2,568,000, $4,272,000 and $368,000 and gross losses
of $143,000, $55,000 and $56,000 were realized on those sales and calls during
1998, 1997 and 1996, respectively.

     The book value of securities pledged to secure deposits and for other
purposes amounts to $221,946,000 and $210,031,000 at December 31, 1998 and 1997,
respectively.

     As permitted under SFAS No. 133, the Corporation transferred securities
held to maturity with a book value of $65,937,000 and a market value of
$71,911,000 to securities available for sale as of October 1, 1998.

NOTE 3 --LOANS

     Major classifications of loans are as follows:

                                                           DECEMBER 31,
                                                  -----------------------------
                                                       1998            1997
                                                   ------------   -------------
                                                          (In Thousands)

     Commercial, financial and agricultural.....   $    280,714    $    275,678
     Real estate-- construction.................        101,715          95,310
     Real estate-- mortgage.....................      1,104,512       1,100,923
     Consumer loans to individuals..............        208,836         180,504
                                                   ------------   -------------

                                                   $  1,695,777    $  1,652,415
                                                   ============   =============

NOTE 4 --ALLOWANCE FOR LOAN LOSSES

     Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                           --------------------------------------------
                                                1998           1997            1996
                                           -------------   ------------   -------------
                                                          (In Thousands)
<S>                                         <C>            <C>             <C>         
Balance at beginning of year.............   $     21,690   $     19,077    $     19,292
Provision charged to operating expense...          4,963          5,802           2,141
Recoveries added to the reserve..........            754          1,124             657
Loan losses charged to the reserve.......        (5,471)         (4,313)        (3,013)
                                           -------------   ------------   -------------
Balance at end of year...................   $     21,936   $     21,690    $     19,077
                                           =============   ============   =============
</TABLE>

                                                                              35
<PAGE>

Impairment of loans having recorded investments of $10,989,000 at December 31,
1998 and $14,549,000 at December 31, 1997, 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 1998 and 1997 was $13,926,000 and
$10,166,000, respectively. The total allowance for loan losses related to these
loans was $2,293,000 and $3,965,000 on December 31, 1998 and 1997, respectively.
Interest income on impaired loans of $804,000 and $513,000 was recognized for
cash payments received in 1998 and 1997, respectively.

Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No.
114 amounted to $3,516,000 and $6,361,000 at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income would
have approximated $482,000 and $320,000 for 1998 and 1997, respectively.

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, 1998
and 1997, these loans totaled $39,786,000 and $40,021,000, respectively. During
1998, total principal additions were $9,438,000 and total principal payments
were $9,673,000.

     The Corporation was indebted to related parties for short-term borrowings
totaling $6,400,000 and $4,004,000 at December 31, 1998 and 1997, respectively.

     The Corporation paid $114,060 in 1998 to the law firm of one director who
serves as legal counsel for a bank subsidiary.

     Construction of bank premises during 1998 included $108,000 paid to
companies of related parties.

NOTE 6 --BANK PREMISES AND EQUIPMENT,NET

     Premises and equipment are summarized as follows:
                                                           DECEMBER 31,
                                                  -----------------------------
                                                       1998            1997
                                                   ------------   -------------

                                                          (In Thousands)
Premises.........................................  $     57,397    $     52,615
Leasehold improvements...........................         7,262           6,828
Furniture and equipment..........................        35,616          33,104
Construction in progress.........................         1,835           2,498
                                                   ------------   -------------

                                                   $    102,110    $     95,045
Less accumulated depreciation and amortization...       (36,955)        (34,087)
                                                   ------------   -------------
                                                   $     65,155    $     60,958
                                                   ============   =============

     Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1998, 1997 and 1996, were
$4,587,000, $4,925,000 and $4,356,000, respectively.

NOTE 7 --DEPOSITS

     The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $242,139,702 and $215,496,000 in 1998 and 1997,
respectively.

     At December 31, 1998, the scheduled maturities of time deposits (in
thousands) are as follows:

                        1999..............................  $    615,287
                        2000..............................       255,960
                        2001..............................        64,831
                        2002..............................        31,445
                        2003..............................        31,750
                        Later years.......................         3,648
                                                            ------------
                                                            $  1,002,921
                                                            ============

36

<PAGE>

NOTE 8 -- SHORT-TERM BORROWINGS

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

     The Corporation has unused lines of credit for short-term borrowings
totaling approximately $428,266,000 at December 31, 1998.
     The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings for the years ended
December 31:

<TABLE>
<CAPTION>
                                                           1998            1997
                                                       ------------   -------------
<S>                                                    <C>             <C>         
                                                              (In Thousands)
Maximum balance at any month end during the year....   $    120,247    $    110,000
Average balance for the year........................        101,455          86,697
Weighted average rate for the year..................          3.77%           3.65%
Weighted average rate on borrowings at year end.....          3.53%           4.72%
Estimated fair value................................        120,247          95,845
</TABLE>

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

     Due to the short maturities of these financial instruments, the carrying
amounts for both repurchase agreements and other short-term borrowings were
deemed to approximate fair values at December 31, 1998 and 1997.

NOTE 9 -- LONG-TERM DEBT

     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 $21,058,000 and $17,136,000 at December 31, 1998 and 1997, maturing
through 2006. The interest rate on the notes payable range from 5.57% to 8.18%
at December 31, 1998. Principal payments on the notes (in thousands) are due as
follows:

                        1999............................... $      2,891
                        2000...............................        3,098
                        2001...............................        3,107
                        2002...............................        2,116
                        2003...............................        2,126
                        Later years........................        7,720
                                                            ------------
                                                            $     21,058
                                                            ============

NOTE 10 -- BUSINESS COMBINATIONS

     On April 1, 1998, the Corporation completed its acquisition of Peoples Bank
of Virginia. A total of approximately 778,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a
pooling-of-interests.

     On April 30, 1998, the Corporation completed its acquisition of J. V.
Arthur, Inc. A total of approximately 91,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a
pooling-of-interests.

     On June 1, 1998, the Corporation completed its acquisition of The Bank of
Alexandria. A total of approximately 646,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a
pooling-of-interests.

                                                                              37

<PAGE>

     Total assets and results of operations as originally reported for 1997 and
1996 have been restated to reflect the accounts of the pooled entities as
follows:


<TABLE>
<CAPTION>
                                                                               NET INCOME PER SHARE
                                                                             ------------------------
                                         TOTAL        TOTAL         NET                    ASSUMING
                                        ASSETS       INCOME       INCOME         BASIC     DILUTION
                                     -----------  -----------   ----------   ----------   -----------
<S>                                  <C>          <C>          <C>           <C>          <C>        
                                                              (In Thousands)
1997 originally reported...........  $ 2,520,312  $   205,634  $    31,115   $     1.54   $      1.53
1997 results of pooled entities....      157,623       15,554        1,689           --            --
                                     -----------  -----------   ----------   ----------   -----------
                    As restated....  $ 2,677,935  $   221,188  $    32,804   $     1.51   $      1.50
                                     ===========  ===========   ==========   ==========   ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                               NET INCOME PER SHARE
                                                                             ------------------------
                                         TOTAL        TOTAL         NET                    ASSUMING
                                        ASSETS       INCOME       INCOME         BASIC     DILUTION
                                     -----------  -----------   ----------   ----------   -----------
                                                              (In Thousands)
<S>                                  <C>          <C>          <C>           <C>          <C>        
1996 originally reported...........  $ 2,303,751  $   188,779  $    29,298   $     1.44   $      1.42
1996 results of pooled entities....      154,680       13,715        1,604           --            --
                                     -----------  -----------   ----------   ----------   -----------
                    As restated....  $ 2,458,431  $   202,494  $    30,902   $     1.41   $      1.40
                                     ===========  ===========   ==========   ==========   ===========
</TABLE>

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

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

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

NOTE 11 -- EARNINGS PER SHARE

     The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock. Potential dilutive common stock has no effect on
income available to common stockholders. Earnings per share amounts for prior
periods have been restated to give effect to the acquisition of Peoples Bank of
Virginia, The Bank of Alexandria and J.V. Arthur Inc.
in 1998.

<TABLE>
<CAPTION>
                                 1998                      1997                       1996
                        ------------------------   -----------------------   ------------------------
                                           PER                       PER                       PER
                                          SHARE                     SHARE                     SHARE
                           SHARES        AMOUNT       SHARES       AMOUNT       SHARES       AMOUNT
                        ------------  ----------   ------------  ---------   ------------  ----------
<S>                       <C>         <C>            <C>         <C>           <C>         <C>       
Basic EPS                 21,884,226  $     1.67     21,714,917  $    1.51     21,892,085  $     1.41
                                      ==========                 =========                 ==========
Effect of dilutive
 securities:
    Stock options            199,756                    163,362                   210,834
                        ------------               ------------              ------------
    Diluted EPS           22,083,982  $     1.65     21,878,279  $    1.50     22,102,919  $     1.40
                        ============  ==========   ============  =========   ============  ==========
</TABLE>

38

<PAGE>

NOTE 12 -- STOCK-BASED COMPENSATION PLANS

     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 $276,000, $173,000 and $136,000 for the years ended December 31,
1998, 1997 and 1996, respectively. No compensation cost has been recognized for
grants under the Employee Stock Discount Plan.

STOCK OPTION PLAN
     The Corporation sponsors a stock option plan, which provides for the
granting of both incentive and nonqualified stock options to executive officers
and key employees of the Corporation 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, 1998, 1997
and 1996 and changes during the years ended on those dates is as follows:

<TABLE>
<CAPTION>
                                 1998                      1997                       1996
                        ------------------------   -----------------------   ------------------------
                                        WEIGHTED                  WEIGHTED                  WEIGHTED
                                         AVERAGE                   AVERAGE                   AVERAGE
                                        EXERCISE                  EXERCISE                  EXERCISE
                           SHARES         PRICE       SHARES        PRICE       SHARES        PRICE
                        ------------  ----------   ------------  ---------   ------------  ----------
<S>                          <C>       <C>              <C>       <C>             <C>       <C>      
Outstanding at
  beginning of year....      289,393   $    9.55        272,496   $   9.12        360,091   $    7.53
Granted................       67,000       17.18         72,240      10.84         99,534       10.20
Exercised..............      (95,787)       9.86       (55,343)       9.15       (186,131)       6.61
Forfeited..............           --                        --                       (998)
                        ------------               ------------              ------------
Outstanding and
  exercisable at end
  of year..............      260,606  $    11.51        289,393  $    9.55        272,496  $     9.12
                        ============               ============              ============
Weighted-average fair
  value per option of
  options granted during
  the year.............               $    22.60                 $   14.75                 $     8.19
</TABLE>

The Corporation accounts for the stock option plan and the stock discount plan
under APB Opinion No. 25. Proforma adjustments of compensation cost for the
stock-based compensation plans are determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123). For the
purpose of computing the proforma amounts indicated below, the fair value of
each option on the date of grant is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 1998, 1997 and 1996, respectively: dividend yields of 2.6%, 3.0% and
3.6%; expected volatility of 19.1%, 18.1% and 20.7%; a risk free interest rate
of 4.5%, 5.8% and 5.1%; and an expected option life of 10 years from the date of
grant.

<TABLE>
<CAPTION>
                                                              1998           1997            1996
                                                         -------------   ------------   -------------
                                                                        (In Thousands)
<S>                                                           <C>            <C>             <C> 
Net Income:    As Reported.............................   $     36,485   $     32,804    $     30,902
               Pro Forma...............................         35,591         32,127          30,402
Basic EPS:     As Reported.............................           1.67           1.51            1.41
               Pro Forma...............................           1.63           1.48            1.39
Diluted EPS:   As Reported.............................           1.65           1.50            1.40
               Pro Forma...............................           1.61           1.47            1.38
</TABLE>

                                                                              39

<PAGE>

A further summary about options outstanding at December 31, 1998, is as follows:

                               OPTIONS OUTSTANDING AND EXERCISABLE
                         -------------------------------------------
                                            WEIGHTED       WEIGHTED
RANGE OF                                   REMAINING       AVERAGE
EXERCISE                     NUMBER        CONTRACTUAL     EXERCISE
PRICES                    OUTSTANDING        LIFE           PRICE
--------------------     ------------   -------------   ------------

   $5.60 -   9.62            15,005            .2 years      $  9.16
   8.14  -  11.89            20,561           1.2              10.74
   7.69  -   9.21            42,438           5.5               8.64
   7.94  -   9.22            21,676           6.0               7.98
   6.91  -  12.91            43,820           7.1               9.75
  10.69  -  14.20            53,606           8.0              10.87
       17.18                 63,500           9.0              17.18
                         ------------
   $5.60 -  17.18           260,606           6.5              11.51
                         ============

EMPLOYEE STOCK DISCOUNT PLAN
     In 1998, 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.
30,411 shares were issued for the 1998 plan year at a discount of $136,000.
46,259 shares were issued for the 1997 plan year at a discount of $148,000.
29,498 shares were issued for the 1996 plan year at a discount of $91,000. The
number of shares available to be issued in future years totals 219,589.

NOTE 13 -- EMPLOYEE BENEFIT PLANS

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

     Under the plan, a participant may contribute to the plan an amount up to
10% of their 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 1998, 1997 and 1996, was $338,000, $240,000 and
$234,000, respectively.

     In 1994, the Corporation adopted an Employee Stock Ownership Plan (ESOP)
covering substantially all full-time employees and providing that employees
automatically become eligible to participate on January 1 or July 1 as of the
date they reach age 18 and complete 12 months of service, whichever occurs last.
The Corporation may make, but is not required to make, a discretionary
contribution for each participant (proportionately based on eligible W-2
salaries) 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 was 5% in cash for 1998, 1997 and 1996.

     The total plan expense for 1998, 1997 and 1996 was $1,412,000, $1,214,000
and $1,049,000, respectively.

NOTE 14 -- EXECUTIVE AND DIRECTOR COMPENSATION PLANS
EXECUTIVE INCENTIVE COMPENSATION PLAN

     The Executive Incentive Compensation Plan was established for the purpose
of attracting and retaining key executives. The executives and the amounts of
the awards (subject to limits as set forth in the Plan) are determined

40

<PAGE>

by a Committee composed of members of the Corporation's Board of Directors
who are not employees. The aggregate cash awards amounted to $1,344,000 in 1998,
$1,320,000 in 1997 and $1,227,000 in 1996.

     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 1998, 1997 and 1996, based on the present value of the
retirement benefits, amounted to approximately $336,000, $505,000 and $572,000,
respectively. The plan is unfunded. However, life insurance has been acquired on
the lives of these employees in amounts sufficient to discharge the obligations
thereunder.

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

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

<TABLE>
<CAPTION>
                                 1998                      1997                       1996
                        ------------------------   -----------------------   ------------------------
                                        WEIGHTED                  WEIGHTED                  WEIGHTED
                                         AVERAGE                   AVERAGE                   AVERAGE
                                        EXERCISE                  EXERCISE                  EXERCISE
                           SHARES         PRICE       SHARES        PRICE       SHARES        PRICE
                        ------------  ----------   ------------  ---------   ------------  ----------
<S>                           <C>      <C>               <C>      <C>             <C>       <C>      
Outstanding at
  beginning of year...        22,693   $    7.10         48,267   $   7.15        142,624   $    6.98
Granted...............            --                         --                        --
Exercised.............        (7,040)       6.26       (25,574)       7.19        (89,567)       6.92
Forfeited.............            --                         --                    (4,790)       6.26
                        ------------               ------------              ------------
                              15,653   $    7.48         22,693   $   7.10         48,267   $    7.15
                        ============               ============              ============
</TABLE>

NOTE 15 -- LEASE COMMITMENTS AND CONTINGENT LIABILITIES
     The Corporation and Subsidiaries were obligated under a number of
noncancelable leases mainly for various banking premises and equipment.
Facilities leases, including renewal options, expire through 2008. Total rental
expense for operating leases for 1998, 1997 and 1996, was $3,443,004, $3,116,000
and $2,985,000, respectively. Minimum rental commitments under noncancelable
leases with terms in excess of one year as of December 31, 1998, were as
follows:

                   YEAR                 OPERATING LEASES
        --------------------------      ----------------

                                          (In Thousands)
        1999......................       $        3,045
        2000......................                2,659
        2001......................                2,237
        2002......................                1,623
        2003......................                1,366
        Later years...............                2,597
                                        ---------------
        Total minimum payments....       $       13,527
                                        ===============

     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, 1998 and 1997, the
aggregate amounts of daily average required balances were approximately
$12,656,000 and $28,867,000, respectively.

                                                                              41
<PAGE>

     The Corporation is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue,
and is developing a remediation plan to resolve the Issue. The Issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Corporation is
heavily dependent on computer processing in the conduct of its business
activities. Failure of these systems could have a significant impact on the
Corporation's operations.

NOTE 16 -- INCOME TAXES

     Net deferred tax assets consist of the following components as of December
31, 1998 and 1997:

                                            1998              1997
                                      ---------------  ---------------
                                               (In Thousands)
Deferred tax assets:
  Provision for loan losses.........   $        7,387  $         7,091
  Salary continuation plan..........            1,350            1,442
  Other real estate owned...........              598              536
  Nonaccrual interest...............               70              113
  Other.............................              382              471
                                      ---------------  ---------------
                                       $        9,787  $         9,653
                                      ---------------  ---------------


Deferred tax liabilities:
  Depreciation......................   $        2,050  $         1,386
  Excess tax basis - acquisition....              271              257
  Securities available for sale.....            3,301            1,338
  Other.............................              102              149
                                      ---------------  ---------------
                                       $        5,724  $         3,130
                                      ---------------  ---------------
                                       $        4,063  $         6,523
                                      ===============  ===============

     The provision for income taxes charged to operations for the years ended
December 31, 1998, 1997 and 1996, consists of the following:

                                 1998           1997            1996
                            -------------   ------------   -------------

                                           (In Thousands)
Current tax expense.......   $     18,560   $     14,851    $     15,938
Deferred tax (benefit)....            497          1,509            (69)
                            -------------   ------------   -------------

                             $     19,057   $     16,360    $     15,869
                            =============   ============   =============

     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, 1998, 1997 and 1996 due to the following:

<TABLE>
<CAPTION>
                                                              1998           1997            1996
                                                         -------------   ------------   -------------
<S>                                                           <C>            <C>             <C>  
Computed "expected" tax expense........................       35.0%          35.0%           35.0%
Increase (decrease) in income taxes resulting from:
  Tax-exempt interest..................................       (1.2)          (1.7)           (2.1)
  Nondeductible merger expenses........................         .1            --               .3
  Other, net...........................................        (.4)           (.1)             .8
                                                         -------------   ------------   -------------
                                                              34.3%          33.2%           34.0%
                                                         =============   ============   =============
</TABLE>

NOTE 17 -- RESTRICTIONS ON TRANSFERS TO PARENT

     Transfer of funds from banking subsidiaries to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. As of December 31, 1998, the aggregate amount

42

<PAGE>

of unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $31,285,000 or 10.9% of the consolidated net assets.

NOTE 18 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

     The Corporation and Subsidiaries are party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation and
Subsidiaries have in particular classes of financial instruments.
     The Corporation and Subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. The
Corporation and Subsidiaries use the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
     Unless noted otherwise, the Corporation and Subsidiaries do not require
collateral or other security to support financial instruments with credit risk.
     A summary of the contract or notional amount of the Corporation and
Subsidiaries' exposure to off-balance-sheet risk as of December 31, 1998 and
1997, is as follows:

<TABLE>
<CAPTION>
                                                                             1998            1997
                                                                         ------------   -------------
                                                                                (In Thousands)
Financial instruments whose contract amounts represent credit risk:
<S>                                                                      <C>             <C>         
  Commitments to extend credit........................................   $    384,463    $    339,417
  Standby letters of credit and financial guarantees written..........   $     22,816    $     20,128
</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, 1998, varies from 0 percent to 100 percent; the
average amount collateralized is 42 percent.

NOTE 19 -- CREDIT RISK
     As of December 31, 1998, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $490,682,000 which were in excess of 10% of the total
loan portfolio. The Corporation does not engage in any foreign lending
activities.
     As of December 31, 1998, the Corporation had $48,343,000 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).

NOTE 20 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

                                                                              43

<PAGE>

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.

 DEPOSITS AND BORROWINGS
     The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. For all
other deposits and borrowings, the fair value is determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on
similar products.

 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, 1998 and 1997, 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>
                                                     1998                            1997
                                         -----------------------------  -----------------------------
                                            CARRYING         FAIR          CARRYING          FAIR
                                             AMOUNT          VALUE          AMOUNT           VALUE
                                         -------------  --------------  -------------   -------------
<S>                                      <C>            <C>             <C>              <C>         
                                                  (In Thousands)                (In Thousands)
FINANCIAL ASSETS:
  Cash and short-term investments......  $     309,589  $      309,589  $     257,058    $    257,058
  Investments securities...............        399,208         404,793        406,707         413,286
  Securities available for sale........        372,481         372,481        254,466         254,466
  Loans................................      1,671,105       1,709,853      1,627,064       1,647,565
                                         -------------  --------------  -------------   -------------
        Total financial assets.........  $   2,752,383  $    2,796,716  $   2,545,295    $  2,572,375
                                         =============  ==============  =============   =============

FINANCIAL LIABILITIES:
  Deposits.............................  $   2,436,022  $    2,440,397  $   2,275,380    $  2,282,437
  Federal funds purchased and securities
    sold under agreement to repurchase.        102,935         102,935         81,336          81,336
  Other short-term borrowings..........         17,312          17,312         14,509          14,509
  Long-term debt.......................         21,058          19,856         17,136          13,887
                                         -------------  --------------  -------------   -------------
        Total financial liabilities....  $   2,577,327  $    2,580,500  $   2,388,361    $  2,392,169
                                         =============  ==============  =============   =============
</TABLE>

NOTE 21 -- REGULATORY MATTERS
     The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
-- actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's

44

<PAGE>

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, 1998, that the Corporation meets all capital
adequacy requirements to which it is subject.
     As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
     There are no conditions or events since that notification that management
believes have changed the institution's category.
     The Corporation's and significant Subsidiaries' actual capital amounts and
ratios are also presented in the table:

<TABLE>
<CAPTION>
                                                                               TO BE WELL CAPITALIZED
                                                             FOR CAPITAL       UNDER PROMPT CORRECTIVE
                                       ACTUAL             ADEQUACY PURPOSES       ACTION PROVISIONS
                                ---------------------  ----------------------- -----------------------
                                 AMOUNT       RATIO       AMOUNT      RATIO       AMOUNT      RATIO
                                ---------  ----------  ----------- ----------- ----------- -----------
<S>                             <C>           <C>        <C>           <C>       <C>           <C>  
                                                           (In Thousands)
As of December 31, 1998:
  Total Capital (to Risk
      Weighted Assets)
      Consolidated...........   $ 293,406     16.3%     >$144,266   >  8.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  80,942     16.4%     >$ 39,615   >  8.0%     >$  49,519  >  10.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  56,056     13.4%     >$ 33,416   >  8.0%     >$  41,770  >  10.0%
                                                        -           -           -           -
  Tier 1 Capital (to Risk
      Weighted Assets)
      Consolidated...........   $ 271,037     15.0%     >$ 72,133   >  4.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  74,752     15.1%     >$ 19,808   >  4.0%     >$  29,711  >  6.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  51,101     12.2%     >$ 16,708   >  4.0%     >$  25,062  >  6.0%
                                                        -           -           -           -
  Tier 1 Capital (to
      Average Assets)
      Consolidated...........   $ 271,037      9.9%     >$109,878   >  4.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  74,752      9.6%     >$ 31,125   >  4.0%     >$  38,906  >  5.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  51,101      7.8%     >$ 26,267   >  4.0%     >$  32,934  >  5.0%
                                                        -           -           -           -
As of December 31, 1997:
  Total Capital (to Risk
      Weighted Assets)
      Consolidated...........   $ 272,319     16.3%     >$133,798   >  8.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  78,440     15.7%     >$ 40,067   >  8.0%     >$  50,084  >  10.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  46,160     14.1%     >$ 26,204   >  8.0%     >$  32,755  >  10.0%
                                                        -           -           -           -
  Tier 1 Capital (to Risk
      Weighted Assets)
      Consolidated...........   $ 251,413     15.0%     >$ 66,899   >  4.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  72,180     14.4%     >$ 20,034   >  4.0%     >$  30,050  >  6.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  42,066     12.9%     >$ 13,102   >  4.0%     >$  19,653  >  6.0%
                                                       -           -           -           -
  Tier 1 Capital (to
      Average Assets)
      Consolidated...........   $ 251,413      9.9%     >$101,376   >  4.0%               N/A
                                                        -           -
      F&M Bank-Winchester....   $  72,180      8.8%     >$ 32,854   >  4.0%     >$  41,067  >  5.0%
                                                        -           -           -           -
      F&M Bank-NOVA..........   $  42,066      8.3%     >$ 20,202   >  4.0%     >$  25,253  >  5.0%
                                                        -           -           -           -
</TABLE>

NOTE 22 -- PROPOSED MERGER
     Security Bank Corporation (SBC) and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization, dated as of November 25, 1998
and related Plan of Merger (collectively, the "Merger Agreement"). This
transaction is subject to the approval of regulatory authorities and
shareholders of SBC. Under the terms of the Merger Agreement, SBC will be merged
with F&M Bank-Northern Virginia and each share of common stock of SBC
outstanding immediately prior to consummation of the Merger will be exchanged,
in a tax-free exchange, for shares of F&M common stock whose aggregate market
value equals $17.25, with cash being paid in lieu of issuing fractional shares.
It is anticipated that the Merger will become effective in the first quarter of
1999. As of December 31, 1998, SBC had total assets of $61.2 million, total
loans of $34.3 million, total deposits of $52.4 million and total shareholders'
equity of $7.9 million.

                                                                              45

<PAGE>

NOTE 23 -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

                            F&M NATIONAL CORPORATION
                            (PARENT CORPORATION ONLY)

                                 BALANCE SHEETS
                           December 31, 1998 and 1997
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                        -----------------------------
                                                                             1998            1997
                                                                        ------------   -------------
<S>                                                                           <C>             <C>    
                                                                                (In Thousands)
ASSETS
 Cash on deposit with subsidiary banks................................   $          1    $          1
  Investment in subsidiaries, at cost, plus equity in undistributed
    net income........................................................        265,306         258,013
  Securities available for sale.......................................         10,063           9,964
  Other short-term investments........................................         24,401           7,726
  Bank premises and equipment, net....................................          1,345           1,348
  Intangible, goodwill, at amortized cost.............................            185             245
  Other assets........................................................         10,719          10,692
                                                                         ------------   -------------
                 Total assets.........................................   $    312,020    $    287,989
                                                                         ============   =============
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Short-term borrowings...............................................   $     17,483    $     14,218
  Dividends payable...................................................          4,263           3,761
  Other liabilities...................................................          3,169           5,159
                                                                         ------------   -------------
                Total liabilities.....................................   $     24,915    $     23,138
                                                                         ------------   -------------
SHAREHOLDERS' EQUITY
  Preferred stock.....................................................   $         --    $         --
  Common stock........................................................         43,743          43,779
  Capital surplus.....................................................         76,404          77,989
  Retained earnings, which are substantially undistributed earnings
    of subsidiaries...................................................        160,980         140,853
  Accumulated other comprehensive income..............................          5,978           2,230
                                                                         ------------   -------------
                Total shareholders' equity............................   $    287,105    $    264,851
                                                                         ------------   -------------
                Total liabilities and shareholders' equity............   $    312,020    $    287,989
                                                                         ============   =============
</TABLE>

46

<PAGE>

                                   F&M NATIONAL CORPORATION
                                  (PARENT CORPORATION ONLY)
                                     STATEMENTS OF INCOME
              For Each of the Three Years in the Period Ended December 31, 1998

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                         --------------------------------------------
                                                              1998           1997            1996
                                                         -------------   ------------   -------------

                                                                         (In Thousands)
REVENUE
<S>                                                       <C>            <C>             <C>         
 Dividends from subsidiaries...........................   $     34,435   $     17,012    $     14,418
  Interest on other short-term investments.............            361            219             665
  Interest and dividends on securities available for sale          427            448             390
  Management fees from subsidiaries....................          3,179          2,826           2,409
  Rental income from subsidiaries......................            123             54              91
  Profits on securities available for sale.............            546          3,252             407
  Other revenue........................................              8             22              11
                                                         -------------   ------------   -------------
                 Total revenue.........................   $     39,079   $     23,833    $     18,391
                                                         -------------   ------------   -------------
EXPENSES
 Salaries and employee benefits........................   $      1,859   $      2,113    $      2,029
  Directors, fees......................................            205            190             178
  Taxes (other than income)............................             51             42              13
  Interest.............................................            360            348             374
  Amortization of goodwill.............................             60             60              60
  Depreciation.........................................             31             34              35
  Merger expenses......................................            226              9             381
  Other expenses.......................................            824          1,068             956
                                                         -------------   ------------   -------------
                 Total expenses........................   $      3,616   $      3,864    $      4,026
                                                         -------------   ------------   -------------
             INCOME BEFORE INCOME TAXES AND EQUITY
              IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES $     35,463   $     19,969    $     14,365

INCOME TAX EXPENSE (BENEFIT)...........................            447          1,143           (164)
                                                         -------------   ------------   -------------
             INCOME BEFORE EQUITY IN UNDISTRIBUTED
                NET INCOME OF SUBSIDIARIES.........       $     35,016   $     18,826    $     14,529

EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES.....          1,469         13,978          16,373
                                                         -------------   ------------   -------------
             NET INCOME.............................      $     36,485   $     32,804    $     30,902
                                                         =============   ============   =============
</TABLE>

                                                                              47

<PAGE>

                                   F&M NATIONAL CORPORATION
                                  (PARENT CORPORATION ONLY)
                                   STATEMENTS OF CASH FLOWS
              For Each of the Three Years in the Period Ended December 31, 1998

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                         --------------------------------------------
                                                              1998           1997            1996
                                                         -------------   ------------   -------------
<S>                                                           <C>            <C>             <C> 
                                                                        (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income............................................   $    36,485    $     32,804    $     30,902
  Adjustments to reconcile net income to net cash provided
    by operating activities:
      Depreciation.....................................            31              34              35
      Amortization.....................................            60              60              60
      Deferred income taxes (credits)..................           276             239           (308)
      Discount accretion...............................            (4)             (4)            (3)
      Profits on securities available for sale.........          (546)         (3,252)          (407)
      Undistributed net income of subsidiaries.........        (1,469)        (13,978)       (16,373)
      Decrease in goodwill.............................             --             --             304
      (Increase) decrease in other assets..............         1,795          (1,781)        (4,804)
      Increase in other liabilities....................        (1,990)          1,345           1,077
                                                         -------------   ------------   -------------
               Net cash provided by operating activities  $    34,638    $     15,467    $     10,483
                                                         -------------   ------------   -------------
CASH FLOWS FROM INVESTING ACTIVITIES
 (Increase) decrease in investment in subsidiaries.....   $    (1,600)   $         --    $        162
  Purchase of securities available for sale............        (2,151)         (2,227)        (6,024)
  Proceeds from sale of securities available for sale..          1,557          8,447           2,954
  (Increase) decrease in other short-term investments..       (16,675)          2,128          12,561
  Purchase of bank premises and equipment..............           (28)             (6)            (3)
                                                         -------------   ------------   -------------
               Net cash provided by (used in) investing
                activities                                $   (18,897)   $      8,342    $      9,650
                                                         -------------   ------------   -------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Increase (decrease) in short-term borrowings..........   $      3,265   $       (237)   $    (4,007)
  Net proceeds from issuance and sale of common stock..          2,959          2,594           3,336
  Acquisition of common stock..........................        (6,109)        (10,594)        (7,456)
  Dividends paid.......................................       (15,856)        (15,703)       (12,049)
                                                         -------------   ------------   -------------

               Net cash (used in) financing activities    $   (15,741)   $    (23,940)   $   (20,176)
                                                         -------------   ------------   -------------
               (Decrease) in cash and cash equivalents    $        --    $       (131)   $       (43)

CASH AND CASH EQUIVALENTS
 Beginning.............................................              1            132             175
                                                         -------------   ------------   -------------

  Ending...............................................   $          1   $          1    $        132
                                                         =============   ============   =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash payments for interest............................   $        360   $        348    $        374
                                                         =============   ============   =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES
 Issuance of stock options under nonvariable
    compensatory plan                                     $      1,529   $        732    $        500
                                                         =============   ============   =============
 Issuance of common stock in exchange for net
    assets in bank acquisition.........................   $         --   $      6,297    $         --
                                                         =============   ============   =============
 Unrealized gain (loss) on securities available for sale  $      1,045   $       (858)   $        215
                                                         =============   ============   =============
</TABLE>

48

<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, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the results
of their operations and their cash flows for the years ended December 31, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.



Winchester, Virginia                         /s/ Yount, Hyde & Barbour, P.C.
January 27, 1999                             YOUNT, HYDE & BARBOUR, P.C.

                                                                              49

<PAGE>

                   [F&M LOGO APPEARS HERE] F&M TRUST COMPANY

     F&M Trust Company began as a new subsidiary of F&M National Corporation on
January 1, 1998. While the corporate structure was new, consolidating three
existing bank trust departments into one entity, we are hardly new to the trust
business since one of those bank departments had been in business for over 71
years.
     F&M Trust Company began 1998 managing consolidated trust assets totaling
$480 million. By year-end, managed trust assets (representing 1627 fiduciary
accounts) exceeded $586 million, a 22 percent growth generated through business
development and investment enhancement.
     Our Company is fortunate to have a seasoned staff of 29 professionals, with
regional offices in Fairfax and Warrenton supported by the headquarters office
in Winchester. Our regional presence allows us to personally serve our expanded
customer base in Virginia, West Virginia and Maryland.
     Unquestionably one of the highlights of the year has been the company's
success in developing new trust business. The net growth in trust assets from
new business generated from outside sources exceeded $75 million. Another
highlight would be our growth in revenue from fiduciary services. Total trust
revenue for 1998 was $2,674,000 which represented a 16 percent increase over the
consolidated trust revenue for the preceding year. Net income from 1998
operations, after taxes, was $426,463 which exceeded initial corporate
projections.
     A third highlight of the year would be investment performance... our record
is outstanding. The portfolio managers for F&M Trust Company remain dedicated to
a disciplined blended approach (value and growth) to the selection of quality
stocks together with a structured allocation process to ensure a prudent
portfolio diversification. Our individually managed accounts and the Company's
collective trust funds had excellent results for 1998. The Balanced Common Trust
Fund produced a return of 22.27 percent for the year which significantly
exceeded the Lipper Balanced Fund Average of 13.48 percent, thereby continuing a
tradition of index out-performance which extends into both the 5-year and
10-year time frames. The Income Fund's return for 1998 was 7.38 percent which
compares very favorably to the Lipper General Bond Fund Average of 6.47 percent.
As with the Balanced Fund, the performance of the Income Fund has also
outdistanced its Lipper Benchmark in the 5- and 10-year horizons.
     With trust operations fully consolidated, personnel fully staffed and our
vision for the future clearly focused, we head to the new century anticipating
continued asset growth and greater profitability for our stockholders. However,
we pledge to never lose sight of our underlying commitment of providing
professional and personal service for each of our fiduciary customers.


                                                [SIGNATURE APPEARS HERE]
                                                F. Dixon Whitworth, Jr. 
                                                President and CEO

 

                      ASSETS AND ACCOUNTS UNDER MANAGEMENT
                      As of December, 31, 1998 (unaudited)

                                                              (IN THOUSANDS)
                                                               ------------
     ASSETS
         Discretionary Assets:
          Bank Deposits.....................................   $      1,964
          United States Treasury and Agency Obligations.....         20,770
          State, County, and Municipal Obligations..........         21,334
          Short Term Interest Bearing Funds.................         48,621
          Notes and Bonds...................................         39,473
          Common and Preferred Stocks.......................        266,287
          Real Estate Mortgages.............................          1,588
          Real Estate.......................................         10,982
          Miscellaneous Assets..............................         13,818
                                                               ------------
         Total Discretionary Assets.........................   $    424,837
                                                               ------------
         Non-Discretionary Assets...........................   $    161,599
                                                               ------------
                                         Total Assets.......   $    586,436
                                                               ============
     ACCOUNTS
         Personal Trusts...............................   382  $    230,205
         Estates and Other Court Accounts..............    30        10,796
         Employee Benefit Accounts.....................   785       156,401
         Agencies and Other............................   430       189,034
                                                               ------------
                                         Total Accounts  1627  $    586,436
                                                               ============
50

<PAGE>

F&M NATIONAL CORPORATION


<TABLE>
<CAPTION>
<S>                                                  <C>
DIRECTORS:                                           OFFICERS:                           
                                                                                         
Frank Armstrong, III                                 W. M. Feltner                       
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER,    CHAIRMAN OF THE BOARD AND           
NATIONAL FRUIT PRODUCT COMPANY, INC.                 CHIEF EXECUTIVE OFFICER             
                                                                                         
W. H. Clement                                        Alfred B. Whitt                     
VICE CHAIRMAN, HIDDEN CREEK                          PRESIDENT, VICE CHAIRMAN,           
INDUSTRIES, INC.                                     CHIEF FINANCIAL OFFICER             
                                                                                         
Charles E. Curtis                                    Charles E. Curtis                   
VICE CHAIRMAN, CHIEF ADMINISTRATIVE OFFICER          VICE CHAIRMAN AND CHIEF             
F&M NATIONAL CORPORATION                             ADMINISTRATIVE OFFICER              
                                                                                         
W. M. Feltner                                        F. Dixon Whitworth, Jr.             
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER,   EXECUTIVE VICE PRESIDENT            
F&M NATIONAL CORPORATION;                                                                
CHAIRMAN OF THE BOARD, F&M BANK-WINCHESTER           Betty H. Carroll                    
                                                     SENIOR VICE PRESIDENT               
John R. Fernstrom                                                                        
CHAIRMAN OF THE BOARD,                               Jack W. Lee, Jr.                    
F&M BANK-ALLEGIANCE                                  SENIOR VICE PRESIDENT-AUDITOR       
                                                                                         
William R. Harris                                    Michael L. Bryan                    
PRESIDENT AND CHAIRMAN OF THE BOARD,                 CORPORATE SECRETARY                 
HARRIS HEATING AND PLUMBING, INC.                                                        
                                                     Barbara H. Ward                     
L. David Horner, III                                 TREASURER                           
CHAIRMAN, HORNER PROPERTIES, INC.                                                        
                                                     Colleen M. Bly                      
Jack R. Huyett                                       DIRECTOR OF HUMAN RESOURCES SERVICES
RETIRED PRESIDENT AND CAO,                                                               
F&M NATIONAL CORPORATION                             Richard B. Wiltshire, Jr.           
                                                     INDEPENDENT LOAN REVIEW OFFICER     
George L. Romine                                     
SALES MANAGEMENT CONSULTANT

J. D. Shockey, Jr.
PRESIDENT, SHOCKEY INDUSTRIES, INC.

Ronald W. Tydings
ATTORNEY, ODIN, FELDMAN AND PITTLEMAN P.C.

Fred G. Wayland, Jr.
RETIRED PRESIDENT, F&M BANK-PEOPLES

Alfred B. Whitt
PRESIDENT, VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
F&M NATIONAL CORPORATION
VICE CHAIRMAN AND SECRETARY
F&M BANK-WINCHESTER

DIRECTORS EMERITI
John S. Scully III
C. Ridgely White
</TABLE>

                                                                              51

<PAGE>

<TABLE>
<CAPTION>
<S>                                     <C>                                     <C>
F&M BANK-WINCHESTER                     CHARGE CARDS:                           D. Elliott Collins                      
                                                                                VICE PRESIDENT                          
DIRECTORS:                              Clyde C. Lamond III                     Jeannette Doyle                         
                                        VICE PRESIDENT-CHARGE CARDS             VICE PRESIDENT                          
Frank Armstrong, III                                                                                                    
Ruth D. Bridgeforth                                                             F&M BANK-                               
Betty H. Carroll                        MONEY MANAGEMENT:                       MASSANUTTEN                             
W. H. Clement                                                                                                           
Charles E. Curtis                       Phyllis K. Bishop                       DIRECTORS:                              
W. M. Feltner, CHAIRMAN                 VICE PRESIDENT                                                                  
Joseph E. Kalbach                       Linda G. Jones                          J. Robert Black                         
George L. Romine                        VICE PRESIDENT                          Robert W. Drechsler                     
J. D. Shockey, Jr.                                                              Dwight W. Hartman                       
Beverley B. Shoemaker                   MARKETING:                              W. Wallace Hatcher, CHAIRMAN            
William A. Truban, DVM                                                          Russell K. Henry, Jr.                   
Alfred B. Whitt                         Jill A. Feltner                         Marian G. Jenkins                       
F. Dixon Whitworth, Jr.                 MARKETING DIRECTOR                      Curtis F. Kite                          
James R. Wilkins, III                                                           W. Price Lineweaver                     
                                        Miles R. Orndorff, Jr.                  Harry L. Rawley                         
DIRECTOR EMERITUS:                      PUBLIC RELATIONS DIRECTOR               Garnett R. Turner                       
Mary M. Henkel                                                                  Nancy H. Whitmore                       
                                        F&M BANK-                               Alfred B. Whitt                         
OFFICERS:                               CENTRAL VIRGINIA                                                                
W. M. Feltner                                                                   OFFICERS:                               
CHAIRMAN OF THE BOARD                   DIRECTORS:                                                                      
                                        Jacob P. Bailey, CHAIRMAN               Russell K. Henry, Jr.                   
Alfred B. Whitt                         William J. Camden                       PRESIDENT AND CHIEF EXECUTIVE OFFICER   
VICE CHAIRMAN, SECRETARY                James N. Fleming                                                                
                                        S. W. Heischman                         Writa D. Hill                           
Charles E. Curtis                       Larry J. McElwain                       SENIOR VICE PRESIDENT,                  
VICE CHAIRMAN                           Ronald L. Moyer                         SENIOR OPERATIONS OFFICER, SECRETARY    
                                        William B. Pollard, M.D.                                                        
Betty H. Carroll                        Robert C. Raynor, M.D.                  Edward A. Strunk                        
PRESIDENT AND CHIEF EXECUTIVE OFFICER   Thomas H. Romer                         SENIOR VICE PRESIDENT                   
                                        Walter L.Tucker, Jr.                                                            
Barbara H. Ward                         Wayne L. Turner                         James G. Link                           
SENIOR VICE PRESIDENT                   F. Dixon Whitworth, Jr.                 VICE PRESIDENT                          
                                                                                                                        
                                        OFFICERS:                               Donna S. Walker                         
LOANS:                                                                          VICE PRESIDENT                          
                                        Wayne L.Turner                                                                  
M. Lee Boppe                            PRESIDENT AND                           F&M-BANK-NORTHERN                       
SENIOR VICE PRESIDENT-LOANS             CHIEF EXECUTIVE OFFICER                 VIRGINIA                                
                                                                                                                        
Frances H. Fortune                      William K. King                         DIRECTORS:                              
SENIOR VICE PRESIDENT-CREDIT            SENIOR VICE PRESIDENT AND SECRETARY                                             
                                        Vicki T. Miller                         Daniel R. Baker                         
Robert E. Lee                           VICE PRESIDENT AND CASHIER              Warren E. Barry                         
SENIOR VICE PRESIDENT-LOANS             Larry F. Mundy                          Robert H. Bird                          
                                        VICE PRESIDENT-COMMERCIAL LENDING       Hugh W. Compton                         
Fay H. DeHaven                                                                  Charles E. Curtis                       
VICE PRESIDENT-LOANS                    F&M BANK-EMPORIA                        James C. Davis                          
                                                                                Frances H. Fannon III                   
Romaine S. Hess                         DIRECTORS:                              David E. Feldman                        
VICE PRESIDENT-LOAN OPERATIONS          C. Butler Barrett                       Howard R. Green                         
                                        Stephen D. Bloom                        Thom F. Hanes                           
Steven D. Tavenner                      Bobby L. Flippen                        Scott C. Humphrey                       
VICE PRESIDENT-LOANS                    Dr. Theopolis Gilliam, Jr.              Reed E. Larson                          
                                        Robert H. Grizzard, Jr., CHAIRMAN       Henry C. Mackall                        
OPERATIONS:                             O. Wayne Hanks                          Charles D. Mercer                       
                                        Arthur H. Kreienbaum, Jr.               Carol B. Moore                          
Peggy J. Marcus                         Wayne P. Leath                          Jon M. Peterson                         
SENIOR VICE PRESIDENT-CASHIER                                                   T. Earl Rogers                          
                                        OFFICERS:                               Thomas D. Rust                          
Shelby C. Hodgson                       O. Wayne Hanks                          Edward Semonian                         
VICE PRESIDENT-BRANCH COORDINATOR       PRESIDENT AND CHIEF EXECUTIVE OFFICER   Robert E. Sevila 
               
                                                                                
Arvilla S. Rinker
VICE PRESIDENT-OPERATIONS

Linda P. Russell
VICE PRESIDENT-NSF OFFICER

Paul E. Shifflett
VICE PRESIDENT-CONTROLLER

52

<PAGE>


Ronald W. Tydings, CHAIRMAN             B. Drew Brown                           Joan B. Oliver                          
Michael M. Webb                         VICE PRESIDENT-COMMERCIAL LENDING       VICE PRESIDENT-DATA PROCESSING          
Michael E. Wicks                        Arlene F. Haley                                                                 
                                        VICE PRESIDENT-COMMERICAL LENDING       Nancy W. Clatterbuck                    
OFFICERS:                               Michael K. Kuhns                        VICE PRESIDENT-BRANCH MANAGER           
                                        VICE PRESIDENT-COMMERCIAL LENDING                                               
T. Earl Rogers                          Robert J. Maiorana                      Daryl A. Urnosky                        
PRESIDENT AND CHIEF EXECUTIVE OFFICER   VICE PRESIDENT-COMMERCIAL LENDING       VICE PRESIDENT-CHIEF FINANCIAL OFFICER  
                                        Robert C. Miller                                                                
Thom F. Hanes                           VICE PRESIDENT-COMMERCIAL LENDING       F&M BANK-RICHMOND                       
EXECUTIVE VICE PRESIDENT AND            Jeffery M. Rosati                                                               
REGIONAL EXECUTIVE OFFICER              VICE PRESIDENT-COMMERCIAL LENDING       DIRECTORS:                              
                                        Alejandro Solis                                                                 
Ramona W. Rodriguez                     VICE PRESIDENT-COMMERCIAL LENDING       James H. Atkinson, Jr.                  
SENIOR VICE PRESIDENT, CHIEF            Carter L. Wormeley                      Jeff C. Bane                            
FINANCIAL OFFICER AND SECRETARY         VICE PRESIDENT-COMMERCIAL LENDING       W. S. Carnes                            
                                        Nancy J. Krause                         Stephen C. Conte                        
Donald E. Strehle                       VICE PRESIDENT-COMPLIANCE OFFICER       Quentin L. Corbett                      
SENIOR VICE PRESIDENT,                  John Djuric                             Lewis T. Cowardin                       
BRANCH ADMINISTRATOR                    VICE PRESIDENT-CONSTRUCTION LENDING     Zane G. Davis                           
John R. Lucas                           Bonnie D. Klepner                       Read F. Goode                           
SENIOR VICE PRESIDENT AND               VICE PRESIDENT-CONTRACTS COORDINATOR    Richard H. Hamlin                       
REGIONAL OFFICER                        Cynthia E. McGlumphy                    A. Lee Hanbury                          
Alice B. Williams                       VICE PRESIDENT-LOAN ADMINISTRATION      William R. Harris, CHAIRMAN             
SENIOR VICE PRESIDENT AND               Thomas F. Bradley                       Seale A. Moorer                         
REGIONAL OFFICER                        VICE PRESIDENT-MORTGAGE LENDING         Thomas L. Newton, Jr.                   
                                        George T. Pawlak                        Thomas E. Pruitt                        
J. David Holden                         VICE PRESIDENT-NETWORK ADMINISTRATOR    James R. Reames                         
SENIOR VICE PRESIDENT-                                                          Oliver D. Rudy                          
BUSINESS DEVELOPMENT                    F&M-PEOPLES                             J. K. Timmons, Jr.                      
                                                                                F. Dixon Whitworth, Jr.                 
Steven R. Wilson                        DIRECTORS:                                                                      
SENIOR VICE PRESIDENT-                                                          OFFICERS:                               
COMMERCIAL LENDING                      Alice Jane Childs                                                               
                                        Alan L. Day, Jr.                        James H. Atkinson, Jr.                  
Steven P. Tees                          Marshall DeF. Doeller                   PRESIDENT AND CHIEF EXECUTIVE OFFICER   
SENIOR VICE PRESIDENT-                  George F. Downes                                                                
RETAIL LENDING                          T. Christopher Jenkins                  Quentin L. Corbett                      
                                        Thomas H. Kirk                          EXECUTIVE VICE PRESIDENT                
Karin M. Johns                          Mark C. Riley                                                                   
CASHIER AND ASSISTANT SECRETARY         Lewis N. Springer                       Wayne D. Eaves                          
                                        Edward C. A. Wachtmeister, CHAIRMAN     SENIOR VICE PRESIDENT                   
Edward P. Alton                         Fred G. Wayland, Jr.                                                            
VICE PRESIDENT-MORTGAGE DIVISION                                                Vera H. Primm                           
                                        DIRECTOR EMERITUS:                      SENIOR VICE PRESIDENT                   
Cynthia C. Fisher                                                                                                       
VICE PRESIDENT-OPERATIONS               Vincent L. Tolson                       K. Bradley Hildebrandt                  
                                                                                SENIOR VICE PRESIDENT                   
Paula A. Newsome                        OFFICERS:                                                                       
VICE PRESIDENT                                                                  Daily H. Stern                          
                                        Mark C. Riley                           VICE PRESIDENT AND COMPLIANCE OFFICER   
Harvey R. Boltwood                      PRESIDENT AND CHIEF EXECUTIVE OFFICER                                           
VICE PRESIDENT-BUSINESS DEVELOPMENT                                             Marshall E. McCall                      
                                        Caren M. Eastham                        VICE PRESIDENT-COMMERCIAL LENDING       
James E. Merritt                        SENIOR VICE PRESIDENT-                                                          
VICE PRESIDENT-BUSINESS DEVELOPMENT     ADMINISTRATIVE SERVICES                 F&M BANK-WEST VIRGINIA                  
                                                                                                                        
Charles W. Whittaker                    Theodore R. Coleman                     DIRECTORS:                              
VICE PRESIDENT-BUSINESS DEVELOPMENT     VICE PRESIDENT-LOANS                                                            
                                                                                William M. Bane                         
Michele K. Parker                       Richard L. Monahan                      Betty H. Carroll                        
VICE PRESIDENT-CASH MANAGEMENT          VICE PRESIDENT-LENDING                  Craig H. Collis                         
                                                                                Charles C. Conrad                       
Peter T. Fuge                                                                   J. Blackwell Davis, Sr.                 
VICE PRESIDENT-COMMERCIAL LOAN OFFICER                                          Douglas E. Haines                       
                                                                                Denver L. Hipp                          
Wayne R. Garcia                                                                 Joseph W. Kessel                        
VICE PRESIDENT-COMMERCIAL LOAN OFFICER                                          J. Wayne Lancaster                      
Robert L. Amsler                                                                Dr. James M. Moler                      
VICE PRESIDENT-COMMERCIAL LENDING                                               Paul L. Reid, CHAIRMAN                  
                                                                                Glen A. Ryan                            
Kathleen Bromley                                                                
VICE PRESIDENT-COMMERCIAL LENDING
 
                                                                            53

<PAGE>

Richard B. Schwinabart                  F&M MORTGAGE SERVICES, INCORPORATED     F&M-SHOMO & LINEWEAVER INCORPORATED     
Rudy R. Sites                                                                                                           
Donald L. Sperow, Sr.                   DIRECTORS:                              DIRECTORS:                              
Alfred B. Whitt                         Betty H. Carroll                        Betty H. Carroll                        
                                        Charles E. Curtis                       Michael A. Conway                       
DIRECTORS EMERTI:                       James M. O'Brien                        Robert W. Drechsler, CHAIRMAN           
                                        Alfred B. Whitt                         Michael E. Fiore                        
Harlan M. Bell                                                                  W. Michael Heatwole, III                
G. Francis Caton                        OFFICERS:                               W. Price Lineweaver                     
William C. Knott                                                                Ellen M. Ritchie                        
Dr. William R. McCune                   James M. O'Brien                        Jerry D. Sheets                         
Evelyn S. Oates                         PRESIDENT AND CHIEF EXECUTIVE OFFICER   Norman J. Stern                         
Harland D. Ridder                       Monique Fraedrich                       Donald W. Wallinger                     
                                        EXECUTIVE VICE PRESIDENT                Alfred B. Whitt                         
OFFICERS:                               John Bobko                                                                      
Denver L. Hipp                          SENIOR VICE PRESIDENT                   OFFICERS:                               
PRESIDENT AND CHIEF EXECUTIVE OFFICER   Robert N. Tyson                                                                 
                                        SENIOR VICE PRESIDENT                   Robert W. Drechsler                     
Ida M. Hull                             Beverly Alexander                       CHAIRMAN                                
SENIOR VICE PRESIDENT AND CASHIER       VICE PRESIDENT                          W. Price Lineweaver                     
                                        Betty H. Carroll                        PRESIDENT                               
Thomas R. Reilly                        VICE PRESIDENT                          Michael E. Fiore                        
SENIOR VICE PRESIDENT-ADMINISTRATION    John G. Mortimer                        SECRETARY                               
                                        VICE PRESIDENT                                                                  
Reginald C. Kimble                      M. Louise Riley                         F&M-J. V. ARTHUR, INCORPORATED          
SENIOR VICE PRESIDENT-LENDING           VICE PRESIDENT                                                                  
                                        Michael L. Bryan                        DIRECTORS:                              
James C. Rodgers                        SECRETARY-TREASURER                     Betty H. Carroll                        
SENIOR VICE PRESIDENT-REGIONAL MANAGER                                          Gary S. Nichols                         
                                                                                Jerry Partlow                           
Bruce E. Ludwick                        F&M TRUST COMPANY                       Terry S. Plank                          
SENIOR VICE PRESIDENT-REGIONAL MANAGER                                          Alfred B. Whitt                         
                                        DIRECTORS:                                                                      
F&M BANK-ALLEGIANCE                     Betty H. Carroll                        OFFICERS:                               
                                        W. H. Clement                                                                   
DIRECTORS:                              Joseph E. Kalbach                       Gary S. Nichols                         
Charles E. Curtis                       Ronald W. Tydings                       PRESIDENT                               
John R. Fernstrom, CHAIRMAN             Edward C. A. Wachtmeister               Jerry Partlow                           
Michael A. Hubert                       Michael M. Webb                         VICE PRESIDENT                          
William E. Knight                       F. Dixon Whitworth, Jr., CHAIRMAN       Terry S. Plank                          
R. Hugh Rial, Jr.                                                               VICE PRESIDENT                          
Jerrold Rosenberg                       OFFICERS:                                                                       
Linda Greer Spooner                                                                                                     
Ronald A. Willoner                      F. Dixon Whitworth, Jr.                 F&M FINANCIAL SERVICES CORPORATION      
                                        PRESIDENT                                                                       
OFFICERS:                               David D. Addison                        DIRECTORS:                              
R. Hugh Rial, Jr.                       SENIOR VICE PRESIDENT                   Norman J. Stern                         
PRESIDENT AND CHIEF                     Marshall J. Beverley, Jr.               W. Michael Heatwole, III                
EXECUTIVE OFFICER                       SENIOR VICE PRESIDENT                                                           
                                        Thomas H. Kirk                          OFFICERS:                               
Robert P. Pugh                          SENIOR VICE PRESIDENT                                                           
EXECUTIVE VICE PRESIDENT                W. Blakely Curtis                       Norman J. Stern                         
                                        VICE PRESIDENT                          PRESIDENT                               
Elaine B. Durkin                        Dennis R. Dorsett                       W. Michael Heatwole, III                
SENIOR VICE PRESIDENT-OPERATIONS        VICE PRESIDENT                          SECRETARY                               
William A. Gallagher                    E. Lee Earnhardt                        
SENIOR VICE PRESIDENT-                  VICE PRESIDENT                          
CHIEF LENDING OFFICER                   
Jack D. Green
SENIOR VICE PRESIDENT-
BRANCH ADMINISTRATION
David S. Cohen
VICE PRESIDENT-CONTROLLER
David W. Irey
VICE PRESIDENT-CONSUMER LOANS
AND COMPLIANCE OFFICER


54

<PAGE>


WINCHESTER
CREDIT CORPORATION

DIRECTORS:

Betty H. Carroll
Charles E. Curtis
Alfred B. Whitt

OFFICERS:

Betty H. Carroll
PRESIDENT
Michael L. Bryan
SECRETARY
Barbara H. Ward
TREASURER


APPLE TITLE COMPANY

DIRECTORS:

Betty H. Carroll
Charles E. Curtis
Alfred B. Whitt

OFFICERS:

Betty H. Carroll
PRESIDENT
Michael L. Byran
SECRETARY
Frances H. Fortune
TREASURER

                                                                              55

<PAGE>

CORPORATE HEADQUARTERS                  22550 Davis Drive                       F&M BANK-MASSANUTTEN                    
                                        Sterling, Virginia 20164                                                        
F&M NATIONAL CORPORATION                703-435-0782                            1855 East Market Street                 
9 Court Square                          RAPPAHANNOCK COUNTY:                    Harrisonburg, Virginia 22801            
Winchester, Virginia 22601              644 Zachary Taylor Highway              540-434-6761                            
540-665-4200                            Flint Hill, Virginia 22627              3150 South Main Street                  
                                        540-675-3596                            Harrisonburg, Virginia 22801            
F&M BANK-WINCHESTER                     SHENANDOAH COUNTY:                      540-433-1330                            
Main Office                             5180 Main Street                        611 Mount Clinton Pike                  
115 North Cameron Street                Mount Jackson, Virginia 22842           Harrisonburg, Virginia 22801            
Winchester, Virginia 22601              540-477-2931                            540-433-9936                            
540-665-4200                            158 South Main Street                   157 North Main Street                   
OTHER BANKING OFFICES:                  Woodstock, Virginia 22664               Broadway, Virginia 22915                
WINCHESTER, VIRGINIA 22601              540-459-5500                            540-896-7083                            
540-665-4200                            9383 Congress Street                    200 Augusta Street                      
100 North Loudoun Street                New Market, Virginia 22844              Grottoes, Virginia 24441                
509A Amherst Street                     540-740-8044                            540-249-5727                            
2252 Valley Avenue                      WARREN  COUNTY:                         1900 South High Street                  
829 North Loudoun Street                540-635-3134                            Harrisonburg, Virginia 22801            
1850 Apple Blossom Drive                102 East Main Street                    540-432-6490                            
748 Berryville Avenue                   Front Royal, Virginia 22630             317 North Main Street                   
124 West Piccadilly Street              215 North Royal Avenue                  Bridgewater, Virginia 22812             
2082 South Pleasant Valley Road         Front Royal, Virginia 22630             540-828-4737                            
2004 South Pleasant Valley Road         Royal Plaza Shopping Center             American Legion Drive and               
CLARKE COUNTY:                          433 South Street                        Route 42                                
23 North Church Street                  Front Royal, Virginia 22630             Timberville, Virginia 22853             
Berryville, Virginia 22611              123 East Sixth Street                   540-896-5858                            
540-955-1222                            Front Royal, Virginia 22630             430 Highlands Place                     
FREDERICK COUNTY:                                                               Harrisonburg, Virginia 22801            
6701 Northwestern Pike                  F&M BANK-CENTRAL VIRGINIA               540-433-2702                            
Gore, Virginia 22637                    1425 Seminole Trail                                                             
540-858-2832                            Charlottesville, Virginia 22901         F&M BANK-NORTHERN VIRGINIA              
7800 Main Street                        804-973-4233                                                                    
Middletown, Virginia 22645              101 Critzer Shop Road                   4117 Chain Bridge Road                  
540-869-1200                            Afton, Virginia 22920                   Fairfax, Virginia 22030                 
5306 Main Street                        540-456-8156                            703-385-3335                            
Stephens City, Virginia 22655           840 South Main Street                   2111 Eisenhower Avenue                  
540-869-3000                            Amherst, Virginia 24521                 Alexandria, Virginia 22314              
1855 Senseny Road                       804-946-2265                            703-299-3563                            
Winchester, Virginia 22602              2208 Ivy Road                           606 King Street                         
540-665-4200                            Charlottesville, Virginia 22903         Aleandria, Virginia 22314               
300 Westminster Canterbury Drive        804-293-9181                            703-683-4066                            
Winchester, Virginia 22603              1113 5th Street Extended                1717 King Street                        
540-665-4200                            Charlottesville, Virginia 22902         Alexandria, Virginia 22314              
LOUDOUN COUNTY:                         804-293-5211                            703-549-8262                            
38997 East Colonial Highway             93 Front Street                         7901 Richmond Highway                   
Hamilton, Virginia 20158                Lovingston, Virginia 22949              Alexandria, Virginia 22308              
540-338-3600                            804-263-4806                            703-780-4095                            
101 Catoctin Circle, SE                 350 Valley Street                       7027A Manchester Boulevard              
Leesburg, Virginia 20175                Scottsville, Virginia 24590             Alexandria, Virginia 22310              
703-771-7202                            804-286-2805                            703-922-8001                            
7 West Market Street                                                            4115 Annandale Road                     
Leesburg, Virginia 20176                F&M BANK-EMPORIA                        Annandale, Virginia 22003               
703-771-7245                                                                    703-642-9212                            
10 West Market Street                   401 Halifax Street                      14260 J Centreville Square              
Leesburg, Virginia 20176                Emporia, Virginia 23847                 Centreville, Virginia 20120             
703-771-7282                            804-634-6555                            703-359-9387                            
7 Broad Way                             301 West Atlantic Street                5105 Westfields Boulevard               
Lovettsville, Virginia 20180            Emporia, Virginia 23847                 Centreville, Virginia 20120             
540-822-9034                            804-634-8855                            703-359-9393                            
202 West Washington Street              431 South Main Street                   13821 Lee Jackson Highway               
Middleburg, Virginia 20117              Emporia, Virginia 23847                 Chantilly, Virginia 20151               
540-687-5731                            804-634-8866                            703-359-9397                            
21 Main Street                                                                  
Round Hill, Virginia 20141
540-338-6065

56

<PAGE>

12220 Fairfax Towne Center              760 Warrenton Road                      1504 Tuscawilla Hills                   
Fairfax, Virginia 22033                 Fredericksburg, Virginia 22406          Charles Town, West Virginia 25414       
703-359-7556                            540-899-3882                            304-728-4270                            
3829 South George Mason Drive                                                   Wal-Mart                                
Falls Church, Virginia 22041                                                    4 Charles Town Plaza                    
703-671-5862                            F&M BANK-RICHMOND                       Charles Town, West Virginia 25414       
133 South Washington Street                                                     304-728-4290                            
Falls Church, Virginia 22046            9401 West Broad Street                  Route 51 West                           
703-352-6194                            Richmond, Virginia 23294                Inwood, West Virginia 25428             
14091 John Marshall Highway             804-346-8080                            304-229-5824                            
Gainesville, Virginia 20155             6980 Forest Hill Avenue                 Route 28 and Carroll Lane               
703-754-8520                            Richmond, Virginia 23225                Fort Ashby, West Virginia 26719         
230 Herndon Parkway                     804-272-5337                            304-298-3667                            
Herndon, Virginia 20170                 209 West Franklin Street                Florida & Southern Drive                
703-435-1000                            Richmond, Virginia 23220                Keyser, West Virginia 26726             
12493 Dillingham Square                 804-780-0122                            304-788-0883                            
Lake Ridge, Virginia 22192              5756 Hopkins Road                       87 North Main Street                    
703-590-8700                            Richmond, Virginia 23234                Keyser, West Virginia 26726             
9201 Church Street                      804-271-5013                            304-788-3111                            
Manassas, Virginia 20110                4851 South Laburnm Avenue               Wal-Mart                                
703-368-1101                            Richmond, Virginia 23231                Route 220 South                         
13414 Dumfries Road                     804-236-9142                            Keyser, West Virginia 26726             
Manassas, Virginia 20112                5001 Lakeside Avenue                    304-788-9010                            
703-791-2265                            Richmond, Virginia 23228                301 W. Burke Street                     
7900 Sudley Road                        804-264-2783                            Martinsburg, West Virginia 25401        
Manassas, Virginia 20110                9960 Midlothian Turnpike                304-264-5000                            
703-392-0370                            Richmond, Virginia 23235                1321 Edwin Miller Boulevard             
6257A Old Dominion Drive                804-320-6610                            Martinsburg, West Virginia 25401        
McLean, Virginia 22101                  11450 Midlothian Turnpike               304-264-5040                            
703-691-7897                            Richmond, Virginia 23235                704 Foxcroft Avenue, North              
25393 Elk Lick Road                     804-271-5033                            Martinsburg, West Virginia 25401        
South Riding, Virginia 20152            1300 East Parham Road                   304-262-6301                            
703-327-0226                            Richmond, Virginia 23227                Wall-Mart                               
7830 Backlick Road                      804-264-2824                            800 Foxcroft Avenue                     
Springfield, Virginia 22150             1776 Staples Mill Road                  Martinsburg, West Virginia 25401        
703-913-0102                            Richmond, Virginia 23230                304-267-9000                            
6810 Commerce Street                    804-355-7841                                                                    
Springfield, Virginia 22150             9012 Three Chopt Road                   F&M BANK-ALLEGIANCE                     
703-451-8100                            Richmond, Virginia 23229                4719 Hampden Lane                       
8432 Old Keene Mill Road                804-282-7527                            Bethesda, Maryland 20814                
Springfield, Virginia 22152             4310 West Hundred Road                  301-656-5300                            
703-451-0074                            Chester, Virginia 23831                 10533 Baltimore Boulevard               
440 Maple Avenue East                   804-748-2735                            Beltsville, Maryland 20705              
Vienna, Virginia 22180                  9970 Ironbridge Road                    301-937-9766                            
703-319-0299                            Chesterfield, Virginia 23832            8019 Snouffer School Road               
8221 Old Courthouse Road                804-271-5015                            Gaithersburg, Maryland 20879            
Vienna, Virginia 22182                  11010 Hull Street Road                  301-417-2640                            
703-359-9390                            Midlothian, Virginia 23112              8401 Corporate Drive                    
14229 Potomac Mills Road                804-271-5025                            Landover, Maryland 20785                
Woodbridge, Virginia 22192                                                      301-731-1700                            
703-497-2333                            17650 Midlothian Turnpike               9401 Key West Avenue                    
                                        Midlothian, Virginia 23113              Rockville, Maryland 20850               
                                        804-897-7187                            301-417-0422                            
F&M BANK-PEOPLES                                                                11921 Rockville Pike                    
                                        F&M BANK-WEST VIRGINIA                  Rockville, Maryland 20852               
21 Main Street                                                                  301-424-3550                            
Warrenton, Virginia 20186               301 South Mildred Street                99 South Washington Street              
540-347-1711                            Ranson, West Virginia 25438             Rockville, Maryland 20850               
251 West Lee Highway                    304-728-4200                            301-217-9494                            
Warrenton, Virginia 20186               Hilldale Shopping Center                8602 Colesville Road                    
540-349-3491                            Route 340 South                         Silver Spring, Maryland 20910           
8318 East Main Street                   Charles Town, West Virginia 25414       301-588-9700                            
Marshall, Virginia 20115                304-728-0216                            
540-364-1511                            Somerset Village Shopping Center        
                                        Route 340 North                         
                                        Charles Town, West Virginia 25414       
                                        304-728-4250                            
                                       

                                                                              57
<PAGE>

2729 University Boulevard, West         APPLE TITLE COMPANY                     
Wheaton, Maryland 20902                 12 Rouss Avenue                         
301-949-2440                            Winchester, Virginia 22601              
                                        540-665-4233                            
                                                                                
F&M TRUST COMPANY                                                               
38 Rouss Avenue                         WINCHESTER CREDIT CORPORATION           
Winchester, Virginia 22601              12 Rouss Avenue                         
540-665-4204                            Winchester, Virginia 22601              
21 Main Street                          540-338-2962                            
Warrenton, Virginia 20186                                                       
540-349-3474                                                                    
4117 Chain Bridge Road                  F&M SERVICES, INCORPORATED              
Fairfax, Virginia 22030                 (A data processing company)             
703-383-1347                            9 Court Square                          
                                        Winchester, Virginia 22601              
                                        
F&M-SHOMO AND LINEWEAVER INSURANCE
AGENCY INCORPORATED
F&M FINANCIAL SERVICES CORPORATION
328 South Main Street
Harrisonburg, Virginia 22801
540-434-1301
2 East Wolfe Street
Harrisonburg, Virginia 22801
57 East Main Street
Luray, Virginia, 22835


F&M-J.V. ARTHUR, INCORPORATED

1104 Amherst Street
Winchester, Virginia 22601
540-662-3865
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4385
821-S South King Street
Leesburg, Virginia 20175
703-777-9455


F&M MORTGAGE SERVICES, INCORPORATED

124 West Piccadilly Street
Winchester, Virginia 22601
540-665-4340
1855 East Market Street
Harrisonburg, Virginia 22801
540-434-6761
5180 Main Street
Mount Jackson, Virginia 22842
540-477-2931
22550 Davis Drive
Sterling, Virginia 20164
703-733-0123
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-263-7334
</TABLE>

58

<PAGE>

                            F&M NATIONAL CORPORATION
                                CORPORATE PROFILE

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

     The Corporation has nine commercial banks, seven located in Virginia, one
located in West Virginia and one in Maryland. Each of these financial
institutions is operated independently which is contrary to the way most bank
holding companies operate. By operating as independent units, they can be more
responsive to their customers' needs since they can make their own decisions on
the local level and they can be better attuned to the needs of the communities
they serve. And yet, though they operate independently, they have the financial
backing and strength of the F&M National Corporation's $2.9 billion in assets.
The combination of the affiliates' independence and the corporation's financial
strength makes F&M National Corporation a truly unique and outstanding financial
institution.

     F&M National Corporation also has seven indirect subsidiaries: Apple Title
Company, F&M Mortgage Services, Incorporated, Winchester Credit Corporation,
F&M-Shomo & Lineweaver and F&M - J.V. Arthur Insurance Agencies, F&M Trust
Company and F&M Services Incorporated, a data processing company.

                                                                              59

<PAGE>

                               GENERAL INFORMATION
ANNUAL MEETING
     The annual meeting of shareholders will be held at the TraveLodge Banquet
Room, 1825 Dominion Avenue, Winchester, Virginia, Tuesday, April 27, at 10:00
a.m.

STOCK TRANSFER AGENT

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

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

INFORMATION

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

     A COPY OF THE CORPORATION'S FORM 10-K ANNUAL REPORT TO THE SECURITIES AND
EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO
ALFRED B. WHITT, F&M NATIONAL CORPORATION.

MAILING ADDRESS

                            F&M National Corporation
                                  P.O. Box 2800
                           Winchester, Virginia 22604

60

<PAGE>


                  TABLE OF CONTENTS


Selected Financial Data............................ 1
To Our Owners, Customers,
  Neighbors and Other Friends...................... 2
1998 Highlights.................................... 4
Management's Discussion and
  Analysis of Financial Condition
  and Results of Operations........................ 6
Financial Statements.............................. 27
Notes to Financial Statements..................... 31
Independent Auditor's Report...................... 49
F&m Trust Company................................. 50
Corporate Directors and
  Officers........................................ 51
Directors and Officers of Affiliates.............. 52
Office Locations.................................. 56
Corporate Profile................................. 59
General Information............................... 60

<PAGE>

                             [F&M LOGO APPEARS HERE]

                           F&M CORPORATE HEADQUARTERS

                        9 Court Square / Winchester, VA