ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Since January 1, 1995, there have been no developments in the Registrant's (hereinafter called "F&M" or the "Company") business other than the following:
On January 19, 1995, F&M Bank-Broadway was merged into F&M Bank-Massanutten.
On March 17, 1995, F&M acquired Farland Investment Management, Inc. ("Farland") through the exchange of 11,980 shares of F&M common stock.
On April 6, 1995, Bank of The Potomac ("Potomac"), Herndon, Virginia with assets of $54.3 million, became a wholly-owned subsidiary of F&M with a tax-free exchange of 872,187 shares of F&M common stock for all of the outstanding shares of Potomac. The share exchange of Potomac has been accounted for as a pooling of interests and, therefore, all financial statements have been restated to reflect the share exchange.
On April 11, 1995, F&M Bank-Winchester acquired from the County of Frederick property located at 9 Court Square, Winchester, Virginia consisting of land and buildings in exchange for 2 parking lots of equal value.
On April 21, 1995, F&M Bank-Winchester opened a full service branch bank at 1855 Senseny Road, Winchester, Virginia.
On June 17, 1995, F&M Bank-Peoples opened a full service branch bank at 760 Warrenton Road, Fredericksburg, Virginia.
On June 20, 1995, F&M Bank-Winchester opened a branch bank at 300 Westminister Canterbury Drive, Winchester, Virginia.
On October 20, 1995, F&M Bank-Martinsburg closed its branch bank located at 131 South Queen Street, Martinsburg, West Virginia, and converted it to an operations center.
On November 22, 1995, FB&T Financial Corporation (FB&T) and F&M announced that they entered into a Definitive Agreement and Plan of Reorganization, and related Plan of Share Exchange (collectively, the Merger Agreement). The transaction is subject to the approval of regulatory authorities and shareholders of FB&T. The proposed merger
will entitle the shareholders of FB&T to receive, in a tax-free exchange, shares of F&M common stock with an aggregate market value equal to $35.00, with cash being paid in lieu of issuing fractional shares. The market value of F&M common stock will be its average closing price as reported on the New York Stock Exchange for each of the ten trading days immediately preceding the closing date. As of December 31, 1995, FB&T's total assets were $243.1 million, total loans were $149.1 million, total deposits were $191.5 million and total shareholders' equity was $16.9 million. The merger will become effective during the first quarter 1996.
On December 12, 1995, F&M Bank-Massanutten opened a full service branch bank at the corner of Route 42 and American Legion Drive, Timberville, Virginia.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
F&M and its subsidiaries are engaged in only one industry segment, banking, the making of commercial and personal loans and similar credit transactions, and other activities closely related to banking.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
THE COMPANY
GENERAL
F&M National Corporation is a multi-bank holding company headquartered in Winchester, Virginia. At December 31, 1995, F&M's eleven Subsidiary Banks operate 77 banking offices offering a full range of banking services principally to individuals and small and middle-market business in north, central and south Virginia including the Shenandoah Valley, and the eastern panhandle of West Virginia. At December 31, 1995, F&M had assets of $1.8 billion, deposits of $1.6 billion and shareholders' equity of $193.5 million.
F&M was formed in 1969 to serve as the parent holding company of its then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its organization, F&M has acquired fourteen banks, which expanded its market area and increased market share in Virginia and West Virginia.
The following Table sets forth certain information concerning F&M and its operating subsidiaries as of December 31, 1995:
(1) Includes Big Apple Mortgage and a general credit reporting agency. Also includes the 1993 purchase of substantially all of the assets and assumption of certain liabilities of Farmers and Merchants Bank of Hamilton(the "Hamilton Bank"). (2) Includes the acquisition in 1989 of The First National Bank of Broadway, Broadway, Virginia. (2) Includes the acquisition in 1986 of Virginia Capital Bank, Richmond, Virginia. (3) Includes the acquisition in 1990 of Peoples Bank of Central Virginia, Lovingston, Virginia.
The business strategy of F&M is to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and level of service of a community bank. F&M has maintained its community orientation by allowing the Subsidiary Banks latitude to tailor products and services to meet community and customer needs. While F&M has preserved the autonomy of its subsidiary Banks, it has established system-wide policies governing, amount other things, lending practices, credit analysis and approval procedures, as well as guidelines for deposit pricing and investment portfolio management. In addition, F&M has established a centralized loan review team that regularly performs a detailed, on-site review and analysis of each Subsidiary Bank's loan portfolio to ensure the consistent application
of credit policies and procedures system-wide. An officer or representative of F&M serves on the board of directors of each Subsidiary Bank to monitor operations and to serve as a liaison to the Company.
The Subsidiary Banks are community-oriented and offer services customarily provided by full-service banks, including individual and commercial demand and time deposit accounts, commercial and consumer loans, residential mortgages, credit card services and safe deposit boxes. Lending is focused on individuals and small and middle-market businesses in the local market regions of the Subsidiary Banks. In addition, F&M Bank-Winchester, F&M Bank-Keyser, F&M Bank-Hallmark, and F&M Bank-Peoples operate trust departments offering a range of fiduciary services. At December 31, 1995, trust assets under management at these four banks totaled $308.5 million.
F&M operates in six market regions: the Shenandoah Valley of Virginia; the eastern panhandle of West Virginia; Charlottesville/ Albemarle County and surrounding areas; Greenville County in southside Virginia; suburban Richmond, primarily Henrico and Chesterfield Counties; the northern Virginia areas of Loudoun, Fairfax, and Prince William Counties and Stafford County, Warrenton and surrounding Fauquier County area. The more populous sectors within each of the six market regions experienced substantial population growth between 1980 and 1990, most of which exceeded 20% growth. At December 31, 1995, F&M operated 39 banking offices in the Shenandoah Valley from Winchester to Harrisonburg with deposits of $534.2 million; nine banking offices in the eastern panhandle of West Virginia with deposits of $242.1 million; seven banking offices in the Charlottesville/Albemarle County area with deposits of $63.5 million; three banking offices in Emporia, Virginia, and surrounding Greenville County with deposits of $55.7 million; nine banking offices in suburban Richmond, Virginia, with deposits of $140.1 million; and six banking offices in Loudoun, Fairfax and Prince William Counties of northern Virginia with deposits of $164.7 million; and four offices in the city of Warrenton and Fauquier and Stafford Counties with deposits of $85.5 million. F&M's principal market is Winchester and the surrounding six Virginia counties where its lead bank, F&M Bank-Winchester, is the dominant financial institution in terms of deposit market share, with a 45% share of total deposits in Winchester, a 25% share of total deposits in surrounding Frederick County, a 27% share of total deposits in Warren County, and a 18% share of total deposits in Loudoun County. In Rockingham County, which has the largest population of any county or city in the Shenandoah Valley, F&M has a 19% deposit market share. In F&M's three-county West Virginia market, F&M has a 22% deposit market share in Jefferson County (which includes Charles Town), a 22% deposit market share in Berkeley County (which includes Martinsburg) and a 49% deposit market share in Mineral County (which includes Keyser). In Fairfax, Prince William, and Fauquier Counties (including Warrenton), F&M has 1%, 1%, and 17% of deposit market share. Although F&M's deposit market share in the Richmond and Charlottesville areas is small, F&M has positioned its banking offices in these two markets to increase deposit market share as a result of continued business and population growth in the suburban markets surrounding Richmond and Charlottesville.
F&M has expanded its market area and increased its market share through both internal growth and strategic acquisitions. Since the beginning of 1988, F&M has acquired approximately $817.6 million in assets and approximately $725.1 million in deposits through ten bank acquisitions. Management believes there are additional opportunities to acquire financial institutions or to acquire assets and deposits that will allow F&M to enter adjacent markets or increase market share in existing markets. Management intends to pursue acquisition opportunities in strategic markets where its managerial, operational and capital resources will enhance the performance of acquired institutions.
The Subsidiary Banks have not experienced loan quality deterioration to the same extent as many other financial institutions, due to conservative underwriting standards and focused in-market lending practices. The purchase of assets of the Hamilton Bank increased nonperforming assets at September 18, 1993, by $27.9 million, of which, $21.3 million were nonaccrual loans and $6.6 million were foreclosed properties. At December 31, 1995, these Hamilton Bank nonaccrual loans and foreclosed properties have been reduced to $3.4 million and $4.6 million, respectively. At December 31, 1995, F&M had total nonperforming assets of approximately $23.9 million, representing 2.24% of period end loans and foreclosed properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Asset Quality."
F&M also operates Big Apple Mortgage Co. Inc., which offers both fixed and adjustable rate residential mortgage loans and servicing . Big Apple Mortgage (also trading as F&M Mortgage Company) sells into the secondary market all the permanent mortgage loans it originates. Big Apple Mortgage purchases government insured 1-4 family FHA and VA loans which it may warehouse and sell when the market rates are attractive. At December 31, 1995, Big Apple Mortgage had $7.8 million in loans that it had committed to purchase, but had not settled upon and, in addition, $16.0 million residential loans were warehoused, available for sale.
F&M's Articles of Incorporation and the Virginia Stock Corporation Act contain certain anti-takeover provisions, including (i) the Affiliated Transactions statue which places restrictions on any significant transaction between a publicly held Virginia corporation and any shareholder who owns more than 10% of any class of its outstanding shares, (ii) the Control Share Acquisitions statue which provides that a shareholder who purchases shares in any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%, and 50% or more of the outstanding shares) cannot vote those shares on any matter unless the acquisition of the additional shares has been approved by disinterested shareholders, and (iii) a super-majority provision in the Company's Articles of Incorporation that requires the affirmative vote of at least 80% of the outstanding voting shares on significant transactions, unless at least two-thirds of the Board of Directors then in office have approved the transaction.
MARKET REGIONS
The market regions of F&M extend from the eastern panhandle of West Virginia southward to Virginia in Winchester, the surrounding Shenandoah Valley through Harrisonburg and Rockingham County and eastward to Loudoun, Fauquier, Stafford and Prince William counties, to the central Virginia markets of Charlottesville and Richmond, and southern Virginia market in Emporia and Greenville County. The following Table displays the market and population data for each of the market regions:
* Represents less than 1% deposit market share NM = Not Meaningful.
(1) In Virginia, certain cities are separate political entities and not part of the counties that surround them. The city of
Winchester and Frederick County, the city of Harrisonburg and Rockingham County, the city of Charlottesville and Albemarle County, the city of Richmond and Henrico and Chesterfield Counties, and the city of Alexandria and Fairfax County are examples. The FDIC and OTS provide deposit data for each separately incorporated city.
(2) Deposit data includes total bank and thrift deposits and is based on FDIC and OTS data as of June 30, 1995, which is the most recently available information.
LENDING ACTIVITIES
All of the Subsidiary Banks offer both commercial and consumer loans, but lending activity is generally focused on consumers and small to middle market businesses within the Subsidiary Banks' respective market regions. Six of the Subsidiary Banks, F&M BankMassanutten, F&M Bank Blakeley, F&M Bank-Martinsburg, F&M BankKeyser, F&M Bank-Emporia, and F&M Bank-Peoples emphasize consumer lending with activities focused primarily on residential real estate and consumer lending. F&M Bank-Richmond, F&M Bank-Central Virginia, F&M Bank-Potomac and F&M Bank-Hallmark are based in larger markets where commercial loan demand is stronger and, as a result, their lending activities place a greater emphasis on small to medium sized business. F&M Bank-Winchester, because of its size and dominant position in its market, has a greater opportunity to appeal to larger commercial customers in addition to consumers.
The following table sets forth the composition of F&M's loan portfolio (by percentage) for the three years ended December 31, 1995:
1995 1994 1993
Commercial 12.8% 13.6% 11.2% Real estate construction 3.9 3.3 4.2 Real estate mortgage: Residential (1-4 family) 33.0 32.9 34.9 Home equity lines 5.2 5.5 4.8 Multifamily 1.9 1.9 1.8 Nonfarm, nonresidential(1) 28.4 26.8 26.5 Agricultural 1.6 1.7 1.7 Real estate mortgage Subtotal 70.1 68.8 69.7 Loans to individuals: Consumer 11.3 12.7 13.5 Credit card 1.9 1.6 1.4 Loans to individuals: Subtotal 13.2 14.3 14.9 Total loans 100.0% 100.0% 100.0% Total loans (dollars) $1,053,829 $1,009,223 $959,052
(1) This category generally consists of commercial and industrial loans where real estate constitutes a source of collateral.
Approximately 12.8% of F&M's loan portfolio at December 31, 1995, was comprised of commercial loans, which included loans secured by real estate shown in the Table above under the categories of multifamily, non-farm, non-residential and agricultural where real estate is among the sources of collateral securing the loan. The Subsidiary Banks offer a variety of commercial loans within their market regions, including revolving lines of credit, working capital loans, equipment financing loans, and letters of credit. Although the Subsidiary Banks typically look to the borrower's cash flow as the principal source of repayment for such loans, many of the loans within this category are secured by assets, such as accounts receivable, inventory and equipment. In addition, a number of commercial loans are secured by real estate used by such businesses and are generally personally guaranteed by the principals of the business. F&M's commercial loans generally bear a floating rate of interest tied to a system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity lines) was 70.1% of its total loan portfolio at December 31, 1995. The residential mortgage loans made by the Subsidiary Banks and Big Apple Mortgage are made only for single family, owner-occupied residences within their respective market regions. The residential mortgage loans offered by the Subsidiary Banks are either adjustable rate loans or fixed rate loans with 20 to 30 year amortization schedules that mature with a balloon payment on the third or fifth year anniversary of the loan.
Big Apple Mortgage offers both fixed and adjustable rate loans, while the Subsidiary Banks generally hold residential mortgage loans in their loan portfolios, Big Apple Mortgage (also trading as F&M Mortgage Company) sells into the secondary market all the permanent mortgage loans it originates. Big Apple Mortgage purchases government insured 1-4 family FHA and VA loans which it may warehouse and sell when the market rates are attractive. At December 31, 1995, Big Apple Mortgage had $7.8 million in loans that it had committed to purchase, but had not settled upon and $16.0 million residential loans were warehoused, available for sale.
F&M's real estate construction portfolio historically has been a relatively small portion of the total loan portfolio. At December 31, 1995, construction loans were $40.7 million or 3.9% of the total loan portfolio. Of this amount, $22.0 million was originated by Big Apple Mortgage, all made to finance owner-occupied properties with permanent financing commitments in place. The Subsidiary Banks make a limited number of loans for acquisition, development and construction of residential real estate. F&M's construction loans, including its acquisition and development loans, generally bear a floating rate of interest and mature in one year or less. Loan underwriting standards for such loans generally limit the loan amount to 75% of the finished appraised value of the project. As a result of strict underwriting guidelines, F&M has experienced no charge-offs involving residential construction loans since 1987.
Loans to individuals were 18.4% of F&M's total loan portfolio at December 31, 1995, if home equity lines were included. The
Subsidiary Banks offer a wide variety of consumer loans, which include consumer loans, credit card loans, home equity lines and other secured and unsecured credit facilities. The performance of the consumer loan portfolio is directly tied to and dependent upon the general economic conditions in the Subsidiary Banks' respective market regions.
CREDIT POLICIES AND PROCEDURES
F&M has established system-wide guidelines governing, among other things, lending practices, credit analysis and approval procedures, and credit quality review. Within these guidelines, the Subsidiary Banks have latitude to tailor their loan products to meet the needs of the communities and specific customers. A holding company officer or representative serves on the Board of Directors of each Subsidiary Bank to monitor practices and to serve as the liaison with F&M.
LOAN APPROVAL. F&M's loan approval policies provide for various levels of officer lending authority. When the aggregate outstanding loans to a single borrower exceed an individual officer's lending authority, the loan request must be approved by an officer with a higher lending limit or by the Subsidiary Bank's loan review committee. F&M has assigned a lending limit for each Subsidiary Bank. Loans that would result in a Subsidiary Bank exceeding its assigned limit must be approved first by the Subsidiary Bank's loan review committee and then by a central credit committee appointed by the holding company. The central credit committee consists of six senior officers of F&M Bank-Winchester and the Company, along with outside directors of either F&M Bank-Winchester or the Company, who rotate at the twice weekly meetings.
All loans to a particular borrower are reviewed each time the borrower requests a renewal or extension of any loan or requests an additional loan. All lines of credit are reviewed annually prior to renewal. These reviews are conducted by each Subsidiary Bank and, if necessary, by F&M's central credit committee.
LOAN REVIEW. Each Subsidiary Bank has a formal loan review function which consists of a committee of bank officers that regularly reviews loans and assigns a classification, if required, based on current perceived credit risk. In addition, the holding company has a loan review team that performs a detailed on-site review and analysis of each Subsidiary Bank's portfolio on at least an annual basis to ensure the consistent application of system-wide policies and procedures. The holding company loan review team reviews all loans over an established principal amount for each Subsidiary Bank, which results in a review of 60% to 75% of the total principal amount of the Subsidiary Bank's loan portfolio. In addition, all lending relationships involving a classified loan are reviewed regardless of size. The holding company loan review team has the authority to classify any loan it determines is not satisfactory or to change the classification of a loan within F&M's loan grading system.
All classified loans are reviewed at least quarterly by F&M's senior officers and monthly by the Subsidiary Bank's boards of directors. All past due and nonaccrual loans are reviewed monthly by the Subsidiary Banks' boards of directors. As a matter of policy, the Subsidiary Banks place loans on nonaccrual status when management determines that the borrower can no longer service debt from current cash flows and/or collateral liquidation. This generally occurs when a loan becomes 90 days past due as to principal and interest.
ALLOWANCE FOR LOAN LOSSES. Each Subsidiary Bank maintains its allowance for loan losses based on loss experience for each loan category over a period of years and adjusts the allowance for existing economic conditions as well as performance trends within specific areas, such as real estate. In addition, each Subsidiary Bank periodically reviews significant individual credits and adjusts the allowance when deemed necessary. The allowance also is increased to support projected loan growth.
IMPAIRED LOANS
On January 1, 1995, F&M adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Statement 114, as amended, applies to all loans that are identified for evaluation, uncollateralized as well as collateralized, except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Homogeneous loans include residential mortgage, credit card and consumer installment loans. A loan is considered impaired when, based on current information and events, it is probable that F&M will be unable to collect all amounts due according to the contractual terms of the loan agreement. A delay of more than 90 days or a shortfall in amount of payments of more than 10% normally would require impairment recognition. However, a loan is not impaired during a period of delay in payment if F&M expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay.
The impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment of those loans is to be based on the fair value for the collateral. Measurement of impairment for loans not meeting the above criteria would be under the aggregate collection experience method. Under this method, loans with similar risk characteristics are aggregated and historical data is used to determine the loan loss for the group. F&M measures the impairment of loans on a loan-by-loan basis.
Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses.
An impaired loan is charged-off when management determines that the prospect of recovery of the principal of the loan has significantly diminished.
The implementation of FASB 114 does not have a material impact on the credit risk of F&M. Information about impaired loans as of and for the period ended follows:
Impaired loans for which an allowance has been provided $ 7,676,449 Impaired loans for which no allowance has been provided 3,029,014 Total impaired loans $ 10,705,463
Allowance provided for impaired loans, included in the allowance for loan losses $ 1,400,961 Average balance in impaired loans $ 10,828,971 Interest income recognized $ 209,087
Impaired loans by measurement method: Fair value of collateral method $ 9,076,463 Expected cash flow method 1,629,000 Aggregate collection experience method -- Total impaired loans $ 10,705,463
DEPOSITS
The Subsidiary Banks offer a number of programs to consumers and to small and middle market businesses at interest rates consistent with local market conditions. The following Table sets forth the mix of depository accounts offered by the Subsidiary Banks as a percentage of total deposits at the dates indicated:
December 31, 1995 1994 1993
Noninterest-bearing demand 14.9% 15.5% 14.2% Interest checking 15.8 17.1 16.7 Savings accounts 11.7 14.1 14.6 Money market accounts 9.2 12.0 13.1 Time deposit accounts: Under $100,000 39.9 35.2 35.2 $100,000 and over 8.5 6.1 6.2 100.0% 100.0% 100.0%
The Subsidiary Banks control deposit flows primarily through pricing of deposits and, to a lesser extent, through promotional activities. The Subsidiary Banks establish deposit rates based on a variety of factors, including competitive conditions, liquidity needs and compliance with net interest margin requirements established by F&M for all Subsidiary Banks. As of December 31, 1995, the Subsidiary Banks had $135.1 million of certificates of deposit greater than $100,000, or 8.5% of total deposits. The Subsidiary Banks do not accept brokered deposits.
No material portion of the deposits of the Subsidiary Banks has been obtained from a single or a small group of customers, and the loss of any customer's deposits or a small group of customers' deposits would not have a material adverse effect on the business of any of the Subsidiary Banks. See "Business-Market Regions" for information regarding each Subsidiary Bank's deposit share and rank in its respective market.
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
The primary functions of asset/liability management are to ensure adequate liquidity and maintain an appropriate balance between interest sensitive assets and interest-sensitive liabilities. Liquidity management involves the ability to meet the cash flow requirements of F&M's loan and deposit customers. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. F&M does not hedge its position with swaps, options or futures but instead maintains a highly liquid and short-term position in all of its earning assets and interest-bearing liabilities.
In order to meet its liquidity needs, F&M schedules the maturity of its investment securities according to its needs. The weighted-average life of the securities portfolio at the end of 1995 was 4 years 8 months which is indicative of F&M's investment philosophy of investing in U.S. Government securities with maturities between five and ten years. F&M views its securities portfolio primarily as a source of liquidity and safety, however, it may if the market is favorable, make changes in the available for sale portfolio to take advantage of changes in the yield curve. F&M views the total available for sale securities portfolio as a source of liquidity, whereas, liquidity in the held to maturity portfolio is limited to calls and maturities. The maturity ranges of the securities and the average taxable-equivalent yields as of December 31, 1995, are shown in the following Table.
A cash reserve, consisting primarily of overnight investments such as Federal Funds, is also maintained to meet any contingencies and to provide additional capital, if needed.
Most of F&M's loans are fixed-rate installment loans to consumers and mortgage loans whose maturities are generally longer than the deposits by which they are funded. A degree of interest-rate risk is incurred if the interest rate on deposits should rise before the loans mature. However, the substantial liquidity provided by the monthly repayments on these loans can be reinvested at higher rates that largely reduce the interest-rate risk. Home equity lines of credit have adjustable rates that are tied to the prime rate. Many of the loans not in the installment or mortgage categories have maturities of less than one year or have floating rates that may be adjusted periodically to reflect current market rates. These loans are summarized in the following Table:
REMAINING MATURITIES OF SELECTED LOANS
December 31, 1995 (Dollars in thousands) Commercial, Financial and Real estate- Agricultural Construction
Within 1 year $ 91,412 $38,527 Variable Rate: 1 to 5 years 1,678 202 After 5 years 190 -- Total 1,868 202
Fixed Rate: 1 to 5 years 33,340 1,994 After 5 years 8,588 -- Total 41,928 1,994 Total Maturities $135,208 $40,723
F&M's asset/liability committee is responsible for reviewing the Corporation's liquidity requirements and maximizing the Corporation's net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Liquidity requirements are also reviewed in detail for each of F&M's individual banks, however, overall asset/liability management is performed on a consolidated basis to achieve a consistent and coordinated approach.
One of the tools F&M uses to determine its interest-rate risk is gap analysis. Gap analysis attempts to examine the volume of interest-rate sensitive assets minus interest-rate sensitive liabilities. The difference between the two is the interest sensitivity gap, which indicates how future changes in interest rates may affect net interest income. Regardless of whether interest rates are expected to increase or fall, the object is to maintain a gap position that will minimize any changes in net interest income. A negative gap exists when F&M has more interest-sensitive liabilities maturing within a certain time period than interest-sensitive assets. Under this scenario, if interest rates were to increase, it would tend to reduce net interest income. At December 31, 1995, F&M had a positive one year balance sheet gap of $98.0 million and a risk to interest margin (gap as a percentage of rate sensitive assets) of 5.85%.
F&M attempts to control interest-rate risk according to its projected needs utilizing maturity and repricing reports. F&M also compares the Olson Model, a dynamic modeling process that projects the impact of different interest rate, loan and deposit growth scenarios over a 12-month period to its projected needs. A large part of F&M's loans and deposits comes from its retail base and does not automatically reprice on a contractual basis in reaction to changes in interest-rate levels. Accordingly, F&M has not experienced the earnings volatility indicated by its interest-sensitive gap position. F&M's net interest margin for 1993, 1994 and 1995 were 4.67%, 4.74% and 4.75%. Whether interest rates were high or low, F&M has been able to maintain adequate liquidity to provide for changes in interest rates and in loan and deposit demands.
OTHER ACTIVITIES
The Subsidiary Banks offer a range of trust services. The Trust Department of F&M Bank-Winchester manages $188.9 million in assets in approximately 1,050 accounts, covering both personal trust activities and employee benefit plans. F&M Bank-Hallmark and F&M Bank-Peoples offer similar trust services and manage assets totaling $28.6 million and $82.8 million, respectively. F&M Bank-Keyser offers a range of trust services as well, managing approximately $8.3 million in assets. The other Subsidiary Banks do not operate trust departments, but are encouraged to offer their customers the opportunity to utilize trust services offered by F&M Bank-Winchester.
COMPETITION
Each of the market regions in which the Company operates has a highly competitive banking market involving commercial banks and thrifts. Other competitors, including credit unions, consumer finance companies, insurance companies and money market mutual funds, compete with the Company for certain lending and deposit gathering services. In its Charlottesville/Albemarle County, the northern Virginia, and suburban Richmond markets, the Company faces particularly intense competition from several state-wide and regional banking institutions which have substantial operations in those market regions. Management believes, however, that the Company enjoys certain competitive advantages in its principal market of Winchester, the surrounding northern Shenandoah Valley and Loudoun County where F&M Bank-Winchester is the largest financial institution headquartered in the area and the dominant bank in terms of deposit market share.
Competition among the various financial institutions is based on interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services, the convenience of banking facilities and, in connection with loans to larger borrowers, relative lending limits. Many of the financial organizations in competition with the Company have much greater financial resources, diversified markets, and branch networks than F&M and are able to offer similar services at varying costs with higher lending limits. With reciprocal interstate banking, the Company also faces the prospect of additional competitors entering its markets as well as additional competition in its efforts to acquire other financial institutions.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and its subsidiaries are elected annually to serve at the pleasure of the Board of Directors of the Company. The following table sets forth the names, offices and ages at February 29, 1995, of each of the executive officers of the Company and is included in conformity with Instruction 3 of Item 401(b) of Regulation S-K:
FIRST NAME AGE ELECTED OFFICE
W. M. Feltner 76 1970 Chairman and Chief Executive Officer of the Company; Chairman of Board, F&M Bank-Winchester
Jack R. Huyett 63 1992 President-Chief Administrative Officer of the Company
F. Dixon Whitworth Jr. 51 1985 Executive Vice President of the Company
Alfred B. Whitt 57 1991 Senior Vice President, Secretary, Senior Financial Officer of the Company and F&M Bank-Winchester
Betty H. Carroll 58 1985 Senior Vice President of the Company; President, Chief Executive Officer, F&M Bank-Winchester
Barbara H. Ward 50 1983 Treasurer of the Company; Senior Vice President of F&M Bank-Winchester
Mr. Feltner has been a senior executive officer of the Company since its inception in 1970.
Mr. Huyett joined the Company in November of 1988 at which time he was President and Chief Executive Officer of Blakeley Bank and Trust Company (now F&M Bank-Blakeley), a position he had held for 19 years. He was appointed President and Chief Administrative Officer of the Company July 1, 1992.
F. Dixon Whitworth, Jr. Winchester, Virginia, joined the Company in August 1985, as President of the Suburban Bank, now F&M Bank-Richmond, and served as such until November, 1985, when he became Executive Vice President of the Company. Prior to joining the Company as President of The Suburban Bank in 1984, he had been employed as Executive Vice President of Southern Bank (now Jefferson National Bank), Richmond, Virginia for eleven years.
Mr. Whitt joined the Company in 1987 as Director of Human Resources, before which time he served as President of F&M Bank-Massanutten, Harrisonburg, Virginia, since its organization in 1973. In January of 1990, he was appointed Senior Financial Officer of the Company and Senior Financial Officer of F&M Bank-Winchester. In July of 1991, he was appointed Senior Vice President, Senior Financial Officer and Secretary of the Company and F&M Bank-Winchester.
On December 7, 1988, Mrs. Carroll was named Chief Executive Officer of F&M Bank-Winchester. Prior thereto, she had been President and Chief Administrative Officer of F&M Bank-Winchester since 1985, and had been Executive Vice President of that bank for eleven years before becoming President and Chief Administrative Officer.
Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester in March of 1992. Prior thereto, she was a Vice President of F&M Bank-Winchester since 1974. She has been Treasurer of the Company since 1983.
SUPERVISION AND REGULATION
The Company and the Subsidiary Banks are subject to state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. The following is a brief summary of certain statues, rules and regulations affecting the Company and the Subsidiary Banks. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Subsidiary Banks. A change in applicable laws or regulations may have a material effect on the business and prospects of the Company.
THE COMPANY
The Company is registered as a bank holding company under the Bank Holding Company Act ("BHCA") and the Virginia Financial Institution Holding Company Act, and is therefore subject to regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia State Corporation Commission (the "Virginia SCC"). The Subsidiary Banks are subject to examination and regulation by the Virginia SCC and the West Virginia Board of Banking and Financial Institutions (the "West Virginia Board of Banking"). In addition, the Company and its Subsidiary Banks are subject to certain minimum capital standards established by the Federal Reserve and the FDIC.
Under the BHCA, the Company is required to secure the prior approval of the Federal Reserve before it can merge or consolidate with any other bank holding company, or acquire all or substantially all of the assets of any bank or acquire direct or indirect ownership or control of any voting shares of any bank that is not already majority owned by it if after such acquisition the Company would directly or indirectly own or control more than 5% of the voting shares of such bank. The BHCA also prohibits the Company from acquiring, directly or indirectly voting shares of, or interests in, or all or substantially all of the assets of, any bank located outside the State of Virginia unless the acquisition is specifically authorized by the laws of the state in which such bank is located, as discussed below.
The Company is prohibited under the BHCA, and regulations promulgated thereunder, from engaging in, and from acquiring direct or indirect ownership or control of more than 5% of voting shares of any company engaged in, nonbanking activities unless the Federal Reserve, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for
certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; and providing certain stock brokerage and investment advisory services.
The Company, as an affiliate of the Subsidiary Banks within the meaning of the Federal Reserve Act, is subject to certain restrictions under the Federal Reserve Act regarding transactions between a bank and companies with which it is affiliated. These provisions limit extensions of credit (including guarantees of loans) by the Subsidiary Banks to affiliates, investments in the stock or other securities of the Company by the Subsidiary Banks and the nature and amount of collateral that Subsidiary Banks may accept from any affiliate to secure loans extended to the affiliate. Further, under the Federal Reserve Act and the regulations promulgated thereunder, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or service.
The BHCA and the Change in Bank Control Act, together with regulations of the Federal Reserve, require that, depending on the particular circumstances, either Federal Reserve approval must be obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to exemptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934, as amended, or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption.
Federal Reserve policy requires a bank holding company to act as a source of financial strength to each of its bank subsidiaries and to take certain measures to preserve and protect bank subsidiaries in situations where additional investments in a troubled bank subsidiary may not otherwise be warranted. Under the recently enacted Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), in order to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee up to certain maximum limits the compliance with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking regulator. See "Recent Legislation and Regulatory Developments." In addition, if a bank holding company has more than one bank or thrift subsidiary, the bank holding company's other subsidiary depository institutions are responsible under a cross guarantee for any losses to the FDIC resulting from the failure of a depository institution subsidiary. Under these provisions, a bank holding company may be required to loan money to its depository institution subsidiaries in the form of capital notes or other instruments. However, any such loans likely would be unsecured and subordinated to such institution's depositors and certain other creditors.
All acquisitions, whether by an in-state or out-of-state acquirer, involving a Virginia bank or bank holding company require the prior approval of the Virginia SCC, in addition to approval by the appropriate federal regulatory authority. Similarly, the West Virginia Board of Banking must approve all acquisitions of a West Virginia bank or bank holding company.
The BHCA currently prohibits the Federal Reserve from approving an application from a bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the state in which the bank whose shares are to be acquired is located. However, under recently enacted federal legislation, the restriction of interstate acquisitions will be abolished effective one year from enactment of such legislation, and thereafter bank holding companies from any state will be able to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state concentration limits. Banks also will be able to branch across state lines effective June 1, 1997 (unless state law would permit such intestate branching at an earlier date), provided certain condition are met, including that applicable state law must expressly permit such interstate branching. Virginia has adopted legislation that will permit branching across state lines effective July 1, 1995, provided there is reciprocity with the state in which the out-of-state bank is based.
REGULATION OF SUBSIDIARY BANKS
All of the Subsidiary Banks are state-chartered institutions organized under either Virginia or West Virginia law. Eight of the Subsidiary Banks, F&M Bank-Winchester, F&M Bank-Massanutten, F&M Bank-Richmond, F&M Bank-Central Virginia, F&M Bank-Emporia, F&M BankHallmark, F&M Bank-Peoples, and F&M Bank-Potomac are Virginiachartered institutions regulated and examined by the Virginia SCC. F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser are West Virginia-chartered institutions regulated and examined by the West Virginia Board of Banking.
The Subsidiary Banks are all members of the Federal Reserve System and are, therefore, supervised and examined by the Federal Reserve, their primary federal regulator. The Federal Reserve and the Virginia SCC or West Virginia Board of Banking, as appropriate, conduct regular examinations of the Subsidiary Banks, reviewing the adequacy of their allowance for loan losses, quality of loans and investments, propriety of management practices, compliance with laws and regulations and other aspects of operations. In addition to these regular examinations, the Subsidiary Banks must furnish the Federal Reserve with quarterly reports containing detailed financial statements and schedules. The FDIC, which provides deposit insurance, also has authority to examine and regulate the Subsidiary Banks.
Federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including maintenance of cash reserves, loans, mortgages maintenance of minimum capital, payment of dividends, and establishment of branch offices. Federal and state bank regulatory agencies also have the general authority to eliminate dividends paid by insured banks if such payment is deemed to constitute an unsafe and unsound practice. As their primary federal regulator, the Federal Reserve has authority to impose penalties, initiate civil administrative actions and take other steps to prevent the Subsidiary Banks from engaging in unsafe or unsound practices. In this regard, the Federal Reserve has adopted capital adequacy requirements applicable to its member banks.
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS
On December 19, 1991, FDICIA was enacted. Among other things, FDICIA provides increased funding for the FDIC's Bank Insurance Fund ("BIF") and expanded regulation of depository institutions and their affiliates, including parent holding companies. A significant portion of the additional BIF funding will be in the form of borrowings to be repaid by insurance premiums assessed on BIF members. These premium increases would be in addition to the increases in deposit premiums made during 1994. FDICIA provides for an increase in BIF's ratio of reserves to insured deposits to 1.25% within the next 15 years, also to be financed by insurance premiums. The result of these provisions could be a significant increase in the insurance assessment rate on deposits of BIF members over the next 15 years. FDICIA provides authority for special assessments against insured deposits and for the development of a system of assessing deposit insurance premiums based upon the financial institution's risk. FDIC announced in early 1995 that current projections indicate the BIF's ratio of reserves could reach the 1.25% requirement by the second quarter of 1996.
On September 15, 1992, the FDIC approved final regulations adopting the risk-related deposit insurance system that was proposed in May 1992. The new risk-related regulations, effective January 1, 1994, will initially result in an eight basis point spread between the highest and lowest deposit insurance premiums. The strongest institutions will continue to pay annual deposit insurance premiums of 0.23% and the weakest will pay 0.31%. Under the final riskrelated insurance regulations, each insured depository institution will be assigned to one of three categories, "well capitalized," "adequately capitalized" or "less than adequately capitalized" as defined in regulations to be established pursuant to FDICIA by the Federal Reserve and the other federal bank regulatory agencies. These categories will be further subdivided into three subgroups based upon the FDIC's evaluations of the risk posed by the depository institution, based in part on examinations by the institution's primary federal and/or state regulator. F&M's banks have received a "1A" risk classification rating for 1995, the highest possible rating and are paying the minimum premium of $2,000 per bank per year.
Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements. FDICIA establishes five
capital tiers: "well capitalized," "adequately capitalized", "under capitalized", "significantly undercapitalized", and "critically undercapitalized", to be further defined by federal regulations. A depository institution is "well capitalized" if it significantly exceeds the minimum level required by regulation for each relevant capital measure, "adequately capitalized" if it meets each such measure, "undercapitalized" if it fails to meet any such measure, "significantly undercapitalized" if it is significantly below any such measure, and "critically undercapitalized" if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity capital equal to not less than 2.0% of total assets and not more than 65% of the minimum leverage ratio to be prescribed by regulation (except to the extent that 2.0% would be higher than such 65% level). An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. In order to be classified as a "well capitalized institution" under the proposed rules, the institution must have a total risk-based capital ratio of 10% and a leverage ratio of 5%.
If a depository institution fails to meet regulatory capital requirements, regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities, require the raising of additional capital, and, ultimately, require the appointment of a conservator or receiver for the institution. The obligation of a controlling bank holding company under FDICIA to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to achieve regulatory capital adequacy requirements. If the controlling bank holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the Federal bankruptcy code, the FDIC's claim may be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.
Any institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. Under-capitalized depository institutions may be subject to growth limitations and are required to submit a capital restoration plan. The federal bank regulatory agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions, is likely to succeed in restoring the depository institutions's capital, and is guaranteed by the parent holding company. If a depository institution fails to submit an acceptable plan, it will be treated as if it were significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions are subject to appointment of a receiver or conservator.
FDICIA contains numerous other provisions, including new reporting requirements, termination of the "to big to fail" doctrine except in special cases, limitations on the FDIC's payment of deposits at foreign branches, and revised regulatory standards for, among other things, real estate lending and capital adequacy.
An insured depository institution may not pay management fees to any person having control of the institution nor may an institution, except under certain circumstances and with prior regulatory approval, make any capital distribution if, after making such payment or distribution, the institution would be undercapitalized. FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.
Other legislative and regulatory proposals regarding changes in banking, and the regulation of bank thrifts and other financial institutions, are being considered by the executive branch of the Federal government, Congress and various state governments, including Virginia and West Virginia. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. It cannot be predicted whether any of these proposals will be adopted or, if adopted, how these proposals will affect the Company.
CAPITAL ADEQUACY
Information on "Capital Adequacy" may be found under ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", "Capital Resources".
DIVIDENDS
Dividends from the Subsidiary Banks constitute the major source of funds for dividends to be paid by the Company. The amount of dividends payable by the Subsidiary Banks to the Company depends upon their earnings and capital position, and is limited by federal and state law, regulations and policy. The Federal Reserve has the general authority to limit dividends paid by the Subsidiary Banks and the Company if such payments are deemed to constitute an unsafe and unsound practice.
As state member banks subject to the regulations of the Federal Reserve, each Subsidiary Bank must obtain approval of the Federal Reserve for any dividend if the total of all dividends declared by the Subsidiary Bank in any calendar year would exceed the total of its net profits for such year, as defined by the Federal Reserve, plus its retained net profits for the preceding two years. In addition, each Subsidiary Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting current losses and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of all loans which are in arrears with respect to interest by six months or more, unless such loans are fully secured and in the process of collection.
In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. Under Virginia law, no dividend may be declared or paid that would impair a bank's paid-in capital. The Virginia SCC also can limit the payment of dividends by any Virginia bank if it determines the limitation is in the public interest and is necessary to ensure the bank's financial soundness.
Under West Virginia law, a state bank may declare a dividend only from its undivided profits and, if the bank's surplus account is not greater than or equal to the par value of the bank's stock, the bank may not declare a dividend unless a portion of the bank's profits for the period for which dividends are declared is credited to the bank's surplus account. Also, a West Virginia-chartered bank must obtain the approval of the West Virginia Board of Banking prior to declaring a dividend if the total of all dividends paid by the bank in any calendar year exceeds the total of its profits for that year plus its undivided profits for the preceding two years. For further information about the Company's dividends, see Part II., Item 5., "Market for Registrant's Common Equity and Related Stockholder Matters".
EMPLOYEES
At December 31, 1995, F&M had 865 full time and 169 part time employees. No employees are represented by any collective bargaining unit. F&M considers relations with its employees to be good.
ITEM 2.

ITEM 2. PROPERTIES
The principal executive offices of F&M are located in the Yost Building at 38 Rouss Avenue, Winchester, Virginia, a two-story building built in 1784 and owned free of any encumbrances. The Company operates a total of 77 banking offices (68 in Virginia and 9 in West Virginia), 55 of which are owned by the Company or one of the Subsidiary Banks free of any encumbrances, and 22 of which are leased under agreements expiring at various dates, including renewal options, through 2008. The Company also owns additional office facilities for various of its lending, audit, accounting and data processing functions. Additional information regarding F&M's lease agreements may be found under ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 14.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and the Subsidiary Banks are parties to various legal proceedings. Based on information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company has not submitted any matters to its security holders since its Annual Meeting of Shareholders held April 25, 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On December 28, 1994, the Company began trading its capital stock on the New York Stock Exchange under the symbol "F M N". Prior to December 28, 1994, the Company's common stock was traded in the over-the-counter market and quoted on the NASDAQ National Market System under the symbol "FMNT".
The following table sets forth the per share high and low last sale prices for the common stock of the Company as reported on the New York Stock Exchange and/or the NASDAQ National Market System, and the cash dividends paid or declared per share on the Common Stock for the period indicated:
PRICE RANGE CASH HIGH LOW DIVIDENDS
First Quarter 17.25 15.38 0.140 Second Quarter 16.50 13.75 0.140 Third Quarter 16.75 14.25 0.140 Fourth Quarter 16.50 14.75 0.145
First Quarter 16.50 15.57 0.145 Second Quarter 16.25 15.50 0.145 Third Quarter 17.37 16.00 0.145 Fourth Quarter 17.25 14.75 0.150
First Quarter 17.12 15.75 0.150 Second Quarter 17.37 15.50 0.150 Third Quarter 18.12 15.62 0.150 Fourth Quarter 20.00 17.25 0.160
At December 31, 1995, there were 16,552,324 shares of Common Stock outstanding held by 7,821 holders of record.
The Company historically has paid cash dividends on a quarterly basis, together with a special cash dividend in the fourth quarter of each year depending upon the Company's performance that year. The Company in 1992 implemented a practice of eliminating the special cash dividend and instead increasing its regular fourth quarter dividend based on the Company's performance, with the intention of paying an equivalent amount for the first three quarters of each following year. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Board of Directors and will depend upon the earnings of the Company and its subsidiaries, principally the Subsidiary Banks, the financial condition of the Company and other factors, including general economic conditions and applicable governmental regulations and policies.
The Company or F&M Bank-Winchester has paid regular cash dividends for more than 50 consecutive years.
The Company is a legal entity separate and distinct from its subsidiaries, and its revenues depend primarily on the payment of dividends from the Subsidiary Banks. The Subsidiary Banks are subject to certain legal restrictions on the amount of dividends they are permitted to pay to the Company. At December 31, 1995, the Subsidiary Banks had available for distribution as dividends to the Company approximately $35.4 million.
ITEM 6.

ITEM 6. SELECTED FINANCIAL INFORMATION
Incorporated herein by reference, as Exhibit 13, to page 1 of the 1995 Annual Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference, as Exhibit 13, to pages 12 through 29 of the 1995 Annual Report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference, as Exhibit 13, to pages 30 through 50 of the 1994 Annual Report.
ITEM 9.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
NONE.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by Part III, Items 10. through 13., is incorporated herein by reference from the Company's definitive proxy statement, dated March 21, 1996, for the Company's Annual Meeting of Shareholders to be held April 23, 1996, which definitive proxy statement was filed with the Commission pursuant to Rule 14a-6 on March 20, 1996. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I under "EXECUTIVE OFFICERS OF THE REGISTRANT".
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents included in Part II of this report are incorporated by reference to the Company's 1995 Annual Report:
(1) Financial Statements Page Report of Independent Certified Public Accountants 50 F&M National Corporation and Subsidiaries: Consolidated Balance Sheets at December 31, 1995 and 1994 30 Consolidated Statements of Income at December 31, 1995 and 1994 31 Consolidated Statements of Changes in Shareholders' Equity for years ended December 31, 1995, 1994 and 1993 32 Consolidated Statements in Cash Flows for the periods ended December 31, 1995, 1994 and 1993 33 Notes to Financial Statements 34
(2) Financial Statement Schedules
All schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(3) Exhibits.
(i) Registrant's Articles of Incorporation, as amended and adopted effective April 25, 1995, (filed herewith).
(ii) Registrant's Bylaws, as amended and adopted effective December 13, 1995 (filed herewith).
(10) Material Contracts.
(i) Form of agreement between seventeen officers of the Registrant under the Registrant's Defined Benefit Deferred Compensation and Salary Continuation Plan (incorporated herein by reference to Exhibit 10(b) to Registration Statement #33-10696, filed on December 9, 1986).
(ii) Registrant's 1982 Incentive and Non-Qualified Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10(a) to Registration Statement #33-20165, filed on February 17, 1988).
(iii) Registrant's Officers' Incentive Bonus Plan (incorporated herein by reference to Exhibit 28(i) to
Registration Statement #33-25867 filed on December 2, 1988).
(iv) Registrant's 1992 Incentive and Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10(b) to Registration Statement #33-50902, filed on August 14, 1992).
(v) Incorporated herein by reference is the Agreement and Plan of Reorganization and Plan of Merger dated November 22, 1995, between the Registrant and FB&T Financial Corporation, filed as Appendix I and Exhibit A, respectively, of the Proxy Statement and Prospectus which is part of Registration Statement No. 333-363 on Form S-4, January 22, 1996.
(vi) The Registrant entered into Executive Severance Agreements with the following Executive Officers of the Registrant on December 1, 1995: Jack R. Huyett, Betty H. Carroll, Alfred B. Whitt, and F. Dixon Whitworth, Jr. (form of agreement filed herewith).
(11) Statement re computation of per share earnings (filed herewith).
(13) Portions of the 1995 Annual Report to Shareholders for the fiscal year ended December 31, 1995 (filed herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified Public Accountants (filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During 1995, the Company filed the following reports:
(i) January 11, 1995, under ITEM 5. to report the Registrant's Board granting authority to its management to purchase up to 250,000 shares of the Registrant's common stock on the open market for general corporate purposes.
(ii) February 21, 1995, under ITEM 5. to report discontinuance and sale of the assets of four of the Registrant's non-bank subsidiaries.
(iii) April 12, 1995, under ITEMS 2. and 7., to report the consummation of the merger of Bank of the Potomac with and into the Registrant.
(iv) November 24, 1995, under ITEM 5. to report approval of a definitive agreement for the affiliation of FB&T Financial Corporation with and into the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 20th day of March, 1996:
F&M NATIONAL CORPORATION Winchester, Virginia
/s/ W. M. Feltner, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the 20th day of March, 1996:
SIGNATURE TITLE
/s/ Chairman of the Board, Chief Executive W. M. FELTNER Officer, Director
/s/ President, Chief Administrative Officer, JACK R. HUYETT Director
/s/ Principal Accounting and Financial Officer, ALFRED B. WHITT Secretary
/s/ FRANK ARMSTRONG, III Director
/s/ JAMES L. BOWMAN Director
/s/ BETTY H. CARROLL Director
/s/ WILLIAM H. CLEMENT Director
/s/ WILLIAM R. HARRIS Director
/s/ L. DAVID HORNER, III Director
/s/ WILLIAM A. JULIAS Director
/s/ Director GEORGE L. ROMINE
/s/ JOHN S. SCULLY, III Director
/s/ J. D. SHOCKEY, JR. Director
/s/ FRED G. WAYLAND, JR. Director
C. RIDGELY WHITE Director
/s/ F. DIXON WHITWORTH, JR. Director