F&M NATIONAL CORP, S-4/A, 1995-02-13

F&M NATIONAL CORP
S-4/A, 1995-02-13
NATIONAL COMMERCIAL BANKS

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As filed with the Securities and Exchange Commission on February 13, 1995
Registration No. 33-57361

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1993

F&M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 6711 54-0857462
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of incorporation Classification Code Number) Identification No.)
or organization)

38 Rouss Avenue
Winchester, Virginia 22601
(703) 665-4200
(Address, including zip code, and telephone number, including area
code of registrant's principal executive office)

Alfred B. Whitt
Senior Vice President and Secretary
F&M National Corporation
38 Rouss Avenue
Winchester, Virginia 22601
(703) 665-4200
(Name, address, including zip code, and telephone number,
including area code of agent for service)

Copies to:
George P. Whitley, Esq. David A. Lawrence, Esq.
LeClair & Ryan Odin Feldman & Pittleman
707 East Main Street, 11th Floor 9302 Lee Highway, 11th Floor
Richmond, Virginia 23219 Fairfax, Virginia 22031

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, checking the following box. ( )

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.

<PAGE>

F&M NATIONAL CORPORATION

CROSS-REFERENCE SHEET
Pursuant to Rule 404(a) of the Securities Act and Item 501(b) of
Regulation S-K, Showing the Location or Heading in the Prospectus and
Proxy Statement of the Information Required by part I of Form S-4

Form S-4 Location or Heading in
Item Number and Caption Prospectus and Proxy Statement

A. Information About the Transaction
1. Forepart of the Registration
Statement and Outside Cover
Page of Prospectus . . . . . . Cover Page of Registration Statement;
Outside Front Cover Page of Proxy
Statement/Prospectus

2. Inside Front and Outside Back
Cover Pages of Prospectus . . . Available Information; Incorporation
of Certain Information by Reference;
Table of Contents

3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information . . . . . . . . . . Summary; Comparative Per Share
Information; Recent Financial
Data of F&M and Potomac
Selected Financial Data; The
Potomac Special Meeting; The
Affiliation; Market Prices and
Dividends; Business of Potomac

4. Terms of the Transaction . . . . Summary; The Affiliation;
Comparative Rights of
Shareholders; Description of
F&M Capital Stock

5. Pro Forma Financial Information. Not Applicable

6. Material Contacts with the
Company Being Acquired. . . . . Summary; The
Affiliation-Background of and
Reasons for the Affiliation,
-Interests of Certain Persons
in the Affiliation

7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters. . . . . . . . . . Not Applicable

8. Interests of Named Experts
and Counsel . . . . . . . . . . Experts; Legal Opinions

9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities. . . . . . . . . Not Applicable

B. Information About the Registrant

10. Information with Respect to S-3
Registrants . . . . . . . . . . Incorporation of Certain
Information by Reference;
Summary; Market Prices and
Dividends; Business of F&M;
Description of F&M Capital
Stock

11. Incorporation of Certain
Information by Reference. . . . Incorporation of Certain
Information Reference

12. Information with Respect to S-2
or S-3 Registrants. . . . . . . Not Applicable

13. Incorporation of Certain
Information by Reference. . . . Not Applicable

14. Information with Respect to
Registrants Other Than S-3
or S-2 Registrants. . . . . . . Not Applicable

C. Information About the Company Being Acquired

15. Information with Respect to S-3
Companies . . . . . . . . . . . Not Applicable

16. Information with Respect to S-2
or S-3 Companies. . . . . . . . Not Applicable

17. Information with Respect to
Companies Other Than S-3 or
S-2 Companies . . . . . . . . . Summary; Comparative Per Share
Information; Recent Financial
Data of F&M and Potomac
Selected Financial Data;
Market Prices and Dividends;
Business of Potomac;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations

D. Voting and Management Information

18. Information if Proxies, Consents
or Authorization are to be
Solicited . . . . . . . . . . . Incorporation of Certain
Information by Reference;
Summary; The Potomac Special
Meeting; The Affiliation

19. Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange
Offer . . . . . . . . . . . . . Not Applicable

<PAGE>
[Potomac Letterhead]

February 15, 1995
Dear Fellow Shareholders:
You are cordially invited to attend the Special Meeting of Shareholders of
the Bank of the Potomac to be held at our Main Office located at 230 Herndon
Parkway, Herndon, Virginia on Wednesday, March 29, 1995 at 4:00 p.m.
At this important meeting, you will be asked to consider and vote on the
Agreement and Plan of Reorganization, dated as of November 18, 1994, and a
related Plan of Share Exchange (collectively, the "Affiliation Agreement")
between the Bank and F&M National Corporation ("F&M"). Based in Winchester,
Virginia, F&M is a bank holding company with $1.7 billion in total assets at
September 30, 1994 and with its principal operations currently being conducted
through 11 affiliated banks in Virginia and West Virginia.
Under the terms of the Affiliation Agreement, F&M will exchange shares of
its common stock whose aggregate market value as of the closing date equals 1.75
times the book value of our Bank's common stock determined as of the month end
immediately preceding the closing date of the Affiliation. Cash will be paid in
lieu of fractional shares. Although the final value of the transaction will not
be established until the closing date, based on the Bank's September 30th book
value, the transaction has an indicated value of approximately $40.00 per share
of Bank common stock. It is anticipated that the affiliation will be made
effective during the early part of the second quarter of this year. Following
the consummation of the transaction with F&M, the Bank will continue to operate
as a separate bank within the F&M system.
Your Board of Directors has retained the investment banking firm of Baxter
Fentriss and Company to act as its financial advisor in connection with the
transaction with F&M. As discussed in the accompanying Proxy
Statement/Prospectus, Baxter Fentriss has delivered to the Board of Directors
its written opinion that, as of this date, the terms of the Affiliation
Agreement are fair from a financial point of view to our shareholders.
The exchange of Bank common stock for F&M common stock (other than for cash
in lieu of any fractional shares) pursuant to the Affiliation Agreement will be
a tax-free transaction for federal income tax purposes. Details of the proposed
transaction with F&M are set forth in the accompanying Proxy
Statement/Prospectus, which you are urged to read carefully in its entirety.
Approval of the transaction with F&M requires the affirmative vote of more than
70% of the outstanding shares of common stock of the Bank.
Your Board of Directors has unanimously approved the Affiliation Agreement
and the transaction with F&M and believes that they are in the best interests of
the Bank and our shareholders. Accordingly, the Board unanimously recommends
that you vote TO APPROVE the Affiliation Agreement.
We hope you can attend the Special Meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. Your vote is important regardless of the
number of shares you own. We look forward to seeing you at the Special Meeting.
Sincerely yours,
THOM F. HANES
President

<PAGE>
BANK OF THE POTOMAC, INC.
Herndon, Virginia
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
March 29, 1995
A Special Meeting of Shareholders of the Bank of the Potomac, Inc.
("Potomac") will be held on Wednesday, March 29, 1995 at 4:00 p.m., local time,
at the Main Office of Potomac, located at 230 Herndon Parkway, Herndon, Virginia
for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
November 18, 1994, between Potomac and F&M National Corporation ("F&M") and a
related Plan of Share Exchange (collectively, the "Affiliation Agreement"),
providing for a share exchange between Potomac and F&M upon the terms and
conditions therein, including, among other things, that each issued and
outstanding share of Potomac common stock will be exchanged for shares of F&M
common stock with an aggregate market value as of the closing date equal to 1.75
times the book value of Potomac common stock determined as of the month end
immediately preceding the consummation of the transaction, with cash being paid
in lieu of issuing fractional shares. The Affiliation Agreement is enclosed with
the accompanying Proxy Statement/Prospectus as Appendix I.
2. To transact such other business as may properly come before the meeting
or any adjournments or postponements thereof.
Each Potomac shareholder will have the right to dissent from the
Affiliation and to demand payment of the fair value of his shares in the event
the Affiliation is approved and consummated. Any right of any such Potomac
shareholder to receive such payment is contingent upon strict compliance with
the requirements set forth in Article 15 of the Virginia Stock Corporation Act,
the full text of which is included as Appendix III to the accompanying Proxy
Statement/Prospectus.
The Board of Directors has fixed February 7, 1995, as the record date for
the Special Meeting, and only holders of record of Potomac common stock at the
close of business on that date are entitled to receive notice of and to vote at
the Special Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
Henry C. Mackall
Secretary
February 15, 1995
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF POTOMAC RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE
THE AFFILIATION AGREEMENT.

<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION.......................................................
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................
SUMMARY.....................................................................
COMPARATIVE PER SHARE INFORMATION...........................................
RECENT FINANCIAL DATA OF F&M AND POTOMAC....................................
SELECTED FINANCIAL DATA.....................................................
THE POTOMAC SPECIAL MEETING.................................................
THE AFFILIATION.............................................................
Background of and Reasons for the Affiliation...............................
Opinion of Financial Advisor................................................
Terms of the Affiliation....................................................
Effective Date..............................................................
Surrender of Stock Certificates.............................................
Representations and Warranties; Conditions to the Affiliation...............
Regulatory Approvals........................................................
Business Pending the Affiliation............................................
Waivers, Amendment and Termination..........................................
Resales of F&M Common Stock.................................................
Accounting Treatment........................................................
Interest of Certain Persons in the Affiliation..............................
Certain Federal Income Tax Matters..........................................
Rights of Dissenting Shareholders...........................................
Certain Differences in Rights of Shareholders...............................
Expenses of the Affiliation.................................................
MARKET PRICES AND DIVIDENDS.................................................
BUSINESS OF POTOMAC.........................................................
Business....................................................................
Lending Activities..........................................................
Ownership of Potomac Common Stock...........................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................
BUSINESS OF F&M.............................................................
History and Business........................................................
F&M's Acquisition Program...................................................
COMPARATIVE RIGHTS OF SHAREHOLDERS..........................................
DESCRIPTION OF F&M CAPITAL STOCK............................................
EXPERTS.....................................................................
LEGAL OPINIONS..............................................................
SHAREHOLDER PROPOSALS.......................................................
OTHER MATTERS...............................................................
INDEX TO FINANCIAL STATEMENTS...............................................
APPENDICES
I -- Agreement and Plan of Reorganization and Plan of Share Exchange
II -- Opinion of Baxter, Fentriss and Company
III -- Article 15 of the Virginia Stock Corporation Act
</TABLE>
BANK OF THE POTOMAC, INC.
PROXY STATEMENT
F&M NATIONAL CORPORATION
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to shareholders of the
Bank of the Potomac ("Potomac") in connection with the solicitation of proxies
by the Board of Directors of Potomac for use at its Special Meeting of
Shareholders (the "Special Meeting") to be held on March 29, 1995, and any
postponements or adjournments thereof.
At the Special Meeting, shareholders will be asked to approve an Agreement
and Plan of Reorganization, dated as of November 18, 1994, between Potomac and
F&M National Corporation, a bank holding company based in Winchester, Virginia
("F&M"), and a related Plan of Share Exchange (collectively, the "Affiliation
Agreement") providing for the affiliation of Potomac with F&M (the
"Affiliation") through the exchange of common stock of Potomac ("Potomac Common
Stock") for the common stock of F&M ("F&M Common Stock"). Upon consummation of
the Affiliation, each outstanding share of Potomac Common Stock, other than
shares as to which appraisal rights have been duly exercised, will be converted
into and exchanged for shares of F&M Common Stock with an aggregate market value
equal to 1.75 times the book value per share of Potomac Common Stock determined
as of the month end immediately preceding the effective date of the Affiliation.
Cash will be paid in lieu of fractional shares. A copy of the Affiliation
Agreement is included as Appendix I hereto.

Baxter Fentriss and Company ("Baxter Fentriss") has rendered its opinion,
updated to the date hereof, to the Board of Directors of Potomac that the terms
of the Affiliation are fair to Potomac's shareholders from a financial point of
view. See "The Affiliation - Opinion of Financial Advisor."
The Board of Directors of Potomac unanimously recommends that shareholders
vote to approve the Affiliation Agreement. Failure to vote is equivalent to
voting against the proposal.
This Proxy Statement/Prospectus also constitutes a prospectus of F&M
covering the shares of F&M Common Stock to be issued to shareholders of Potomac
in connection with the Affiliation. The outstanding shares of F&M Common Stock
are, and the shares offered hereby will be, listed on the New York Stock
Exchange ("NYSE") and traded under the symbol "FMN".
This Proxy Statement/Prospectus is first being mailed to shareholders of
Potomac on or about February 15, 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF F&M COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
The Date of This Proxy Statement/Prospectus is February 15, 1995.

<PAGE>
AVAILABLE INFORMATION
F&M is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center (13th Floor), New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information concerning F&M also may be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. As permitted by the rules and regulations of the Commission, this Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration statement on Form S-4, of which this Proxy Statement/Prospectus is
a part, and exhibits thereto (together with the amendments thereto, the
"Registration Statement"), which have been filed by F&M with the Commission
under the Securities Act of 1933 (the "Securities Act") with respect to F&M
Common Stock and to which reference is hereby made for further information.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by F&M are incorporated
by reference in this Proxy Statement/Prospectus: (i) F&M's Annual Report on Form
10-K for the year ended December 31, 1993; (ii) F&M's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1994, June 30, 1994 and September 30,
1994; and (iii) F&M's Current Reports on Form 8-K, filed January 18, 1994,
February 14, 1994, March 14, 1994, March 17, 1994, July 8, 1994, July 20, 1994,
October 21, 1994, November 1, 1994, December 1, 1994, December 30, 1994 and
January 18, 1995. All documents filed by F&M pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the date of the Special Meeting shall be deemed to be incorporated
by reference herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that also is
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
The information contained in this Proxy Statement/Prospectus relating to
F&M has been supplied by F&M, and the information relating to Potomac has been
supplied by Potomac.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE CERTAIN DOCUMENTS RELATING
TO F&M THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE IN SUCH DOCUMENTS) ARE AVAILABLE, WITHOUT CHARGE, UPON REQUEST FROM
ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED DIRECTED TO:
ALFRED B. WHITT, SENIOR VICE PRESIDENT AND SECRETARY, F&M NATIONAL CORPORATION,
P.O. BOX 2800, WINCHESTER, VIRGINIA 22604; TELEPHONE NUMBER (703) 665-4200. IN
ORDER TO ENSURE TIMELY DELIVERY OF ANY REQUESTED DOCUMENTS, THE REQUEST SHOULD
BE MADE BY MARCH 23, 1995.
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE DESCRIPTION OF ALL
MATERIAL FACTS REGARDING F&M, POTOMAC AND THE MATTERS TO BE CONSIDERED AT THE
SPECIAL MEETING AND IS QUALIFIED IN ALL RESPECTS BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS INCLUDING THE APPENDICES HERETO AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE.
THE PARTIES
F&M. F&M is a multi-bank holding company headquartered in Winchester,
Virginia. F&M has eleven subsidiary banks (the "Subsidiary Banks") that operate
73 banking offices which offer a full range of banking services principally to
individuals and to small and medium sized businesses in the Shenandoah Valley of
Virginia, central and northern Virginia and the eastern panhandle of West
Virginia. 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 thirteen banks, which have expanded its market
area and increased its market share in Virginia and West Virginia. At September
30, 1994, F&M had total assets of $1.7 billion, total deposits of $1.4 billion
and total shareholders' equity of $161.7 million. F&M's principal executive
offices are located at 38 Rouss Avenue, Winchester, Virginia 22601, and its
telephone number is (703) 665-4200. See "Selected Financial Data" and "Business
of F&M."

<PAGE>
F&M Common Stock is listed for trading on the NYSE under the symbol
"FMN."

POTOMAC. Potomac is a state-chartered commercial bank and member of the
Federal Reserve System ("Federal Reserve") that commenced its banking business
in the fall of 1988 and which provides commercial and consumer banking services
primarily to customers in the western Fairfax County and eastern Loudoun County
area of northern Virginia. At September 30, 1994, Potomac had total assets of
$55.2 million, total deposits of $47.4 million, and total shareholders' equity
of $7.4 million. The principal executive offices of Potomac are located at 230
Herndon Parkway, Herndon, Virginia 22070. See "Business of Potomac" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
THE SPECIAL MEETING
TIME, PLACE AND PURPOSE. The Special Meeting will be held on March 29, 1995
at 4:00 p.m. at Potomac's Main Office located at 230 Herndon Parkway, Herndon,
Virginia 22070. At the Special Meeting, Potomac shareholders will be asked to
consider and vote upon a proposal to approve the Affiliation Agreement, attached
hereto as Appendix I.
RECORD DATE. Only holders of record of Potomac Common Stock at the close of
business on February 7, 1995, will be entitled to notice of and to vote at the
Special Meeting. At the record date, there were approximately 405 holders of
record of the 325,000 shares of Potomac Common Stock then outstanding and
entitled to vote at the Special Meeting. See "The Potomac Special Meeting."
THE AFFILIATION
The Affiliation provides for the exchange of each outstanding share of
Potomac Common Stock for F&M Common Stock. F&M will then serve as the parent
bank holding company for Potomac, which will continue to carry on its banking
business in substantially the same manner as before the Affiliation.
At the effective date of the Affiliation, each outstanding share of Potomac
Common Stock will be exchanged for shares of F&M Common Stock with an aggregate
market value of 1.75 times the per share book value of Potomac Common Stock
determined as of the month end immediately preceding the effective date of the
Affiliation (the "Exchange Ratio"), and cash in lieu of any fractional shares.
Accordingly, the number of shares of F&M Common Stock that will be issued
pursuant to the Exchange Ratio cannot be determined until the Effective Date.
However, based on the closing price of F&M Common Stock on the NYSE of $16.00
per share on February 9, 1995 and the book value per share of Potomac Common
Stock of $22.89 at September 30, 1994, each share of Potomac Common Stock would
be exchanged for 2.50 shares of F&M Common Stock, with a cash payment of in lieu
of issuing any fractional share. See "The Affiliation - Terms of the
Affiliation."
In addition, each stock option issued by Potomac pursuant to both its 1994
Directors' Stock Option Plan and 1989 Incentive Stock Option Plan (the "Potomac
Stock Option Plans") (allowing holders to acquire an aggregate of up to 44,400
shares of Potomac Common Stock as of December 31, 1994) outstanding at the
Effective Date shall cease to be outstanding and will be exchanged for shares of
F&M Common Stock. The shares of F&M Common Stock issued in exchange for the
stock options will have an aggregate market value (determined as described
above) equal to the so-called equity represented by each stock option, which is
measured as the difference between the original per share exercise price of the
stock option and 1.75 times the per share book value of Potomac Common Stock as
of the month end immediately preceding the effective date of the Affiliation.
Cash will be paid in lieu of issuing any fractional share.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF POTOMAC
The Board of Directors of Potomac has unanimously approved the Affiliation,
including the Affiliation Agreement. The Board of Directors believes that the
Affiliation is fair to and in the best interests of the shareholders of Potomac
and recommends a VOTE FOR the Affiliation. See "The Affiliation - Background of
and Reasons for the Affiliation."
OPINION OF FINANCIAL ADVISOR
The Board of Directors of Potomac retained Baxter Fentriss to act as its
financial advisor in connection with the Affiliation, and Baxter Fentriss has
rendered its opinion to the Board of Directors of Potomac that the terms of the
Affiliation are fair from a financial point of view to the Potomac shareholders.
The full text of Baxter Fentriss' opinion, updated to the date hereof, is set
forth as Appendix II to this Proxy Statement/Prospectus and should be read in
its entirety with respect to the assumptions made and other matters considered
and limitations on the review undertaken. See "The Affiliation - Opinion of
Financial Advisor."
VOTE REQUIRED
Approval of the Affiliation requires the affirmative vote of the holders of
more than 70% of the outstanding shares of Potomac Common Stock. As of the
record date, directors and executive officers of Potomac and their affiliates
beneficially owned approximately 46,400 shares of Potomac Common Stock, or 14.3%
of the shares of Potomac Common Stock outstanding on such date (exclusive of
shares of Potomac Common Stock subject to outstanding options that are currently
exercisable). The directors and executive officers of Potomac have indicated
their intention to vote their shares of Potomac Common Stock in favor of the
Affiliation. See "The Potomac Special Meeting - Vote Required."
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING THE
"ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF
THE AFFILIATION AGREEMENT.
EFFECTIVE DATE
The Affiliation will become effective at the date and time set forth on the
Certificate of Share Exchange issued by the Virginia State Corporation
Commission (the "Effective Date"). The Effective Date will occur as soon as
practicable following the date that all conditions specified in the Affiliation
Agreement have been satisfied or waived. The Affiliation is expected to be made
effective during the second quarter of 1995. F&M and Potomac each has the right,
acting unilaterally, to terminate the Affiliation Agreement should the
Affiliation not be consummated by August 31, 1995. See "The Affiliation - The
Effective Date."
DISTRIBUTION OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
As soon as practicable after the Effective Date, F&M Bank-Winchester, as
the exchange agent, will mail to each Potomac shareholder (other than dissenting
shareholders) a letter of transmittal and instructions for use in order to
surrender the certificates representing shares of Potomac Common Stock in
exchange for certificates representing shares of F&M Common Stock. Cash (without
interest) will be paid to Potomac shareholders in lieu of the issuance of any
fractional shares in an amount equal to the fraction of a share of F&M Common
Stock to which such shareholder would otherwise be entitled multiplied by the
average of the closing prices of F&M Common Stock as reported on the NYSE during
the ten trading days immediately preceding the Effective Date. See "The
Affiliation - Surrender of Stock Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
LeClair, Ryan, Joynes, Epps & Framme, counsel for F&M, has delivered an
opinion that, among other things, (i) no gain or loss will be recognized by
Potomac shareholders to the extent they receive shares of F&M Common Stock
solely in exchange for their Potomac Common Stock pursuant to the Affiliation,
(ii) the aggregate tax basis of F&M Common Stock received by a Potomac
shareholder will equal the aggregate tax basis of the Potomac Common Stock
surrendered in exchange therefor by such shareholder (reduced by any amount
allocable to fractional share interests for which cash is received), and (iii)
the holding period of the F&M Common Stock received will generally include the
holding period of the Potomac stock surrendered if the Potomac Common Stock is
held as a capital asset at the Effective Date. For a more complete description
of the federal income tax consequences of the Affiliation, see "The Affiliation
- -Certain Federal Income Tax Consequences."
DUE TO THE INDIVIDUAL NATURE OF THE TAX CONSEQUENCES OF THE AFFILIATION, IT
IS RECOMMENDED THAT EACH POTOMAC SHAREHOLDER CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES OF THE AFFILIATION.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
The Affiliation Agreement provides that following the Effective Date, F&M
shall indemnify any person with respect to matters occurring on or prior to the
Effective Date who has rights to indemnification from Potomac, to the same
extent and on the same conditions as in effect on the date of the Affiliation
Agreement. F&M has also agreed to use its reasonable best efforts to maintain
Potomac's existing directors' and officers' liability policy, or another policy
providing at least comparable coverage, covering persons who are currently
covered by such insurance of Potomac for a period of three years after the
Effective Date on terms no less favorable than those on the date of the
Affiliation Agreement. The Affiliation Agreement also contains provisions
concerning employee benefits after the Affiliation. See "The Affiliation -
Interests of Certain Persons in the Affiliation."
CONDITIONS TO CONSUMMATION OF THE AFFILIATION; TERMINATION
Consummation of the Affiliation is subject to various conditions, including
among other matters: (i) receipt of the approval of the shareholders of Potomac
solicited hereby; (ii) receipt of an opinion of counsel as to the tax-free
nature of the Affiliation (except for cash received in lieu of fractional shares
or upon the exercise of dissenters' rights); and (iii) approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended ("BHC Act"), and the Virginia State
Corporation Commission (the "Virginia SCC"). Substantially all of the
conditions to consummation of the Affiliation may be waived, in whole or in
part, to the extent permissible under applicable law by the party for whose
benefit the condition has been imposed, without the approval of the shareholders
of that party. Regulatory approvals and receipt of the opinion as to the
tax-free nature of the Affiliation may not, however, be waived. See

<PAGE>
"The Affiliation - Representations and Warranties; Conditions to the
Affiliation" and "The Affiliation - Regulatory Approvals."
The Affiliation Agreement may be terminated and the Affiliation abandoned
notwithstanding shareholder approval (i) by mutual agreement of the Boards of
Directors of F&M and Potomac or (ii) by either F&M or Potomac if the Effective
Date has not occurred by August 31, 1995 or if certain specified events occur.
See "The Affiliation - Waivers, Amendment and Termination."
EFFECTS OF THE AFFILIATION ON THE RIGHTS OF POTOMAC SHAREHOLDERS
Upon consummation of the Affiliation, Potomac shareholders will become
shareholders of F&M. While the rights of the former shareholders of Potomac will
continue to be governed by the Virginia Stock Corporation Act (the "Virginia
SCA") since F&M is a Virginia corporation, the rights of Potomac shareholders
will also be as provided for under the Articles of Incorporation and Bylaws of
F&M. The provisions of the Articles of Incorporation and Bylaws of F&M differ in
certain material respects from the Articles of Incorporation and Bylaws of
Potomac. See "Comparative Rights of Shareholders."
ACCOUNTING TREATMENT
It is intended that the Affiliation will be accounted for as a pooling of
interests. It is intended that F&M will receive an opinion from its outside
auditors that the Affiliation will be accounted for as a pooling of interests,
but it is not a condition to the consummation of that transaction. See "The
Affiliation - Accounting Treatment."
RIGHTS OF DISSENT AND APPRAISAL
Each holder of Potomac shares may dissent from the Affiliation and is
entitled to the rights and remedies of dissenting shareholders provided in
Article 15 of the Virginia SCA, subject to compliance with the procedures set
forth therein, including the right to appraisal of his or her stock. A copy of
Article 15 is attached as Appendix III to this Proxy Statement/Prospectus and a
summary thereof is included under "The Affiliation - Rights of Dissenting
Shareholders."
RESALES OF F&M COMMON STOCK
Shares of F&M Common Stock received in the Affiliation will be freely
transferable by the holders thereof, except for those shares held by those
holders who may be deemed to be "affiliates" (generally including directors,
certain executive officers and major shareholders) of Potomac under applicable
federal securities laws. See "The Affiliation - Resales of F&M Common Stock."
MARKETS AND MARKET PRICES
Since December 28, 1994, F&M Common Stock has been listed for trading on
the NYSE under the symbol "FMN". Prior thereto, F&M Common Stock was traded in
the over-the-counter market and quoted on the Nasdaq National Market System
("Nasdaq/NMS") under the symbol "FMNT". The market value of F&M Common Stock
on November 17, 1994, the last full trading day preceding the public
announcement of the execution of the Affiliation Agreement and based on closing
price of F&M Common Stock on the Nasdaq/NMS, was $16.25 per share.
The market value of F&M Common Stock on February 9, 1995, the latest practicable
date prior to the date of the Proxy Statement/Prospectus and based on the
closing price on the NYSE Composite Transactions List, was $16.00 per
share. See "Market Prices and Dividends."
Potomac Common Stock is not traded on any exchange and no established
public trading market exists for Potomac Common Stock.
BECAUSE THE MARKET PRICE OF F&M COMMON STOCK IS SUBJECT TO FLUCTUATION, THE
PER SHARE MARKET VALUE OF F&M COMMON STOCK THAT POTOMAC SHAREHOLDERS WILL
RECEIVE PURSUANT TO THE AFFILIATION MAY INCREASE OR DECREASE PRIOR TO THE
EFFECTIVE DATE, BUT THE AGGREGATE VALUE OF F&M COMMON STOCK RECEIVED BY POTOMAC
SHAREHOLDERS WILL STILL EQUAL 1.75 TIMES THE POTOMAC BOOK VALUE AS OF THE MONTH
END IMMEDIATELY PRECEDING THE EFFECTIVE DATE. POTOMAC SHAREHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR F&M COMMON STOCK. THE NUMBER OF SHARES OF
F&M COMMON STOCK TO BE ISSUED PURSUANT TO THE AFFILIATION WILL ALSO DEPEND ON
THE BOOK VALUE OF POTOMAC COMMON STOCK AS OF THE MONTH END IMMEDIATELY PRECEDING
THE EFFECTIVE DATE.
F&M ACQUISITION PROGRAM
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since the beginning of 1988,
F&M has acquired approximately $745.7 million in assets and approximately
$592.2 million in deposits through nine 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 new 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 and may, after the date of this Proxy Statement/
Prospectus, enter into agreements to acquire one or more financial
institutions. See "Business of F&M - F&M's Acquisition Program."
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The table below presents selected comparative unaudited per share
information (i) for F&M on a historical basis and on a pro forma combined basis
assuming the Affiliation had been effective during the periods presented and
accounted for as a pooling of interests and (ii) for Potomac on a historical
basis and on a pro forma equivalent basis. The information shown below should be
read in conjunction with the historical financial statements of F&M and Potomac
and the respective notes thereto that are included elsewhere herein or
incorporated herein by reference. Results for F&M and Potomac for the nine
months ended September 30, 1994 are not necessarily indicative of results to be
expected for their entire fiscal years, nor are pro forma amounts necessarily
indicative of results that will be obtained on a combined basis.
As explained more fully in Note 1 below, because number of shares of F&M
Common Stock issuable pursuant to the Exchange Ratio will not be established
until the Effective Date, it is assumed for purposes of this table that
2.50 shares of F&M Common Stock will be issued for each share of Potomac
Common Stock. BECAUSE THE MARKET PRICE OF F&M COMMON STOCK IS SUBJECT TO
FLUCTUATION AND THE BOOK VALUE OF POTOMAC COMMON STOCK WILL LIKELY CHANGE PRIOR
TO THE FIXING OF THE EXCHANGE RATIO, THE PRO FORMA COMBINED AND POTOMAC PRO
FORMA EQUIVALENT AMOUNTS ARE SUBJECT TO CHANGE.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
PER COMMON SHARE:
NET INCOME:
Potomac-historical.............................. $1.08 $1.42 $0.79 $0.00
F&M-historical.................................. 0.95 1.20 1.14 0.82
Pro forma combined.............................. 0.92 1.16 1.09 0.77
Potomac pro forma equivalent (1)................ 2.30 2.90 2.73 1.93
CASH DIVIDENDS DECLARED:
Potomac-historical.............................. 0.15 0.08 -- --
F&M-historical.................................. 0.40 0.61 0.44 0.41
Pro forma combined.............................. 0.40 0.58 0.41 0.39
Potomac pro forma equivalent (1)................ 1.00 1.45 1.03 0.98
BOOK VALUE:
Potomac-historical.............................. 22.89 22.24 20.90 20.10
F&M-historical.................................. 10.33 10.06 9.25 8.35
Pro forma combined.............................. 10.25 9.97 9.18 8.30
Potomac pro forma equivalent (1)................ 25.63 24.93 22.85 20.75
</TABLE>

(1) Potomac pro forma equivalent amounts represents F&M's pro forma combined
information multiplied by an assumed Exchange Ratio of 2.50 shares of F&M Common
Stock for each share of Potomac Common Stock, which has been computed for
purposes of this summary as follows: the September 30, 1994 book value per share
of Potomac Common Stock ($22.89) multiplied by 1.75 ($40.06) and divided by the
closing price of F&M Common Stock on the NYSE Composite Transactions
List on February 9, 1995 ($16.00) to arrive at an assumed Exchange Ratio of 2.50
shares of F&M Common Stock for each share of Potomac Common Stock.

RECENT FINANCIAL DATA OF F&M AND POTOMAC

For the twelve months ended December 31, 1994, net income for F&M was $5.3
million or $.34 per share, compared to $4.5 million or $.30 per share for the
same period in fiscal 1993. For the twelve months ended December 31, 1994, net
income for F&M increased to $20.2 million or $1.29 per share, from $18.3
million or $1.20 per share for fiscal 1993. At December 31, 1994 and 1993, F&M
had total assets of $1.65 billion and $1.62 billion, respectively. Total loans
were $977.9 million at December 31, 1994 compared to $929.1 million at year-end
1993. Deposits at December 31, 1994 increased to $1.44 billion, up from $1.42
billion at December 31, 1993.

For the twelve months ended December 31, 1994, net income for Potomac was
$468 thousand or $1.44 per share as compared with $462 thousand or $1.42 per
share for 1993. As of December 31, 1994, Potomac had total assets of $57.6
million, total loans of $31.0 million and total deposits of $49.9 million.

The following tables set forth certain unaudited financial data for F&M
and Potomac, except that the financial data for the year ended December 31,
1993 is audited for each organization. In the opinion of the respective
managements of F&M and Potomac, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of such unaudited periods have been
included.

F&M National Corporation (Historical)

Three Months Ended
December 31, Year Ended
(Unaudited) December 31,
1994 1993 1994 1993
(unaudited)
(In thousands, except for share data)
Income Data
Net interest income $18,506 $17,634 $ 70,793 $ 61,585
Provision for loan losses 965 982 2,587 2,807
Noninterest income 3,580 3,501 16,118 14,651
Noninterest expense 13,961 13,577 54,339 46,529
Income taxes 1,815 2,048 9,752 8,630
Net income $ 5,345 $ 4,528 $ 20,233 $ 18,270

Per Share Data
Net income $ 0.34 $ 0.30 $ 1.29 $ 1.20
Cash dividends 0.15 0.14 0.57 0.61
Book Value, end of period 10.34 10.06 10.34 10.06
Average shares outstanding 15,645 15,252 15,645 15,252

Period End Balances
Assets $1,650,904 $1,617,848
Loans, net of unearned income 977,932 929,069
Securities 494,957 483,398
Deposits 1,441,191 1,419,977
Shareholders' equity 161,435 157,266

Performance Ratios (1)
Return on average assets 1.28% 1.12% 1.22% 1.24%
Return on average equity 13.16 11.54 12.50 12.28

(1) Annualized for the twelve months ended December 31, 1994 and 1993 with
respect to the three month periods ended December 31, 1994 and 1993,
respectively.

Bank of Potomac (Historical)
Year Ended
December 31,
1994 1993
(In thousands, except per share data)
Income Data
Net interest income $ 2,390 $ 2,335
Provision for loan losses (53) 50
Noninterest income 194 192
Noninterest expense 1,945 1,801
Income taxes 224 214
Net income $ 468 $ 462

Per Share Data
Net income $ 1.44 $ 1.42
Cash dividends 0.15 0.075
Book value, end of period 23.24 22.24
Average shares outstanding 325 325

Period End Balances
Assets $57,589 $52,809
Loans, net 30,925 29,984
Securities 19,531 19,457
Deposits 49,880 45,310
Shareholders' equity 7,554 7,228

Performance Ratios
Return on average assets 0.84% 0.92%
Return on average equity 6.35 6.60

SELECTED FINANCIAL DATA
The following table presents selected historical financial information for
F&M and Potomac. This information is derived from and should be read in
conjunction with the historical financial consolidated statements of F&M and the
historical financial statements of Potomac and the respective notes thereto
included elsewhere in the Proxy Statement/Prospectus or in documents
incorporated herein by reference. See "Incorporation of Certain Information by
Reference." All adjustments necessary to present a fair statement of results of
interim periods of F&M and Potomac, (which adjustments were of a normal
recurring nature) in the opinion of the respective managements of F&M and
Potomac, have been included. Results for F&M and Potomac for the nine months
ended September 30, 1994 and 1993, are not necessarily indicative of the results
to be expected for their entire fiscal years.
F&M NATIONAL CORPORATION (HISTORICAL)

<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA
Net interest income.......... $ 52,287 $ 43,951 $ 61,585 $ 55,267 $ 49,419 $ 48,736 $ 46,659
Provision for loan losses.... 1,622 1,825 2,807 3,410 6,653 3,260 2,251
Noninterest income........... 12,538 11,150 14,651 12,279 11,310 9,518 8,698
Noninterest expense.......... 40,378 32,952 46,529 41,436 38,505 36,703 33,485
Income taxes................. 7,937 6,582 8,630 6,674 4,262 5,100 5,288
Net income................... 14,888 13,742 18,270 16,026 11,309 13,191 14,333
PER SHARE DATA
Net income................... $ 0.95 $ 0.91 $ 1.20 $ 1.14 $ 0.82 $ 0.96 $ 1.05
Cash dividends............... 0.40 0.35 0.61 0.44 0.41 0.39 0.36
Book value, end of period.... 10.33 10.02 10.06 9.25 8.35 7.93 7.25
Average shares outstanding... 15,649 15,131 15,252 14,089 13,797 13,736 13,643
PERIOD END BALANCES
ASSETS....................... $1,657,397 $1,613,000 $1,617,848 $1,362,892 $1,260,360 $1,159,237 $1,091,805
LOANS, NET OF UNEARNED
INCOME................... 976,765 919,900 929,061 752,705 738,284 741,751 713,808
SECURITIES................... 491,801 469,700 483,398 420,599 345,587 262,505 236,500
DEPOSITS..................... 1,443,324 1,411,500 1,419,977 1,188,397 1,115,839 1,024,776 968,867
SHAREHOLDERS' EQUITY......... 161,716 156,216 157,266 139,370 115,582 108,597 100,878
PERFORMANCE RATIOS (1)
Return on average assets..... 1.20% 1.29% 1.24% 1.24% 0.94% 1.16% 1.37%
Return on average equity..... 12.28 12.56 12.28 12.86 10.11 12.58 15.08
Capital Ratios
Leverage..................... 9.78% 10.96% 9.32% 10.20% 9.14% 9.37% -%
Risk-based:
Tier 1 capital............... 16.1 15.35 15.50 17.60 15.22 15.19 --
Total capital................ 17.0 16.60 16.75 18.99 16.52 16.35 --
</TABLE>

(1) Annualized for the nine months ended September 30, 1994 and 1993.
(2) The amounts previously resported on F&M's Reports on Form 10-Q and
10-K for the periods presented have been restated to reflect the
acquisition on July 1, 1994 of both PNB Financial Corporation and
Hallmark Bank and Trust Company and a 2.5% stock dividend effective
September 1, 1994.
BANK OF THE POTOMAC (HISTORICAL)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA
Net interest income.............. $ 1,770 $ 1,733 $ 2,335 $ 2,056 $ 1,680 $ 1,552 $ 1,101
Provision for loan losses........ (52) 39 50 213 309 79 123
Noninterest income............... 139 149 192 176 168 134 43
Noninterest expense.............. 1,436 1,335 1,801 1,771 1,538 1,357 1,012
Income taxes..................... 173 159 214 59 - 76 8
Cumulative effect adjustment..... - - - 69 - -
Net income....................... 352 349 462 258 1 174 1
PER SHARE DATA
Net income....................... $ 1.08 $ 1.07 $ 1.42 $ 0.79 $ 0.003 $ 0.54 $ 0.003
Cash dividends................... 0.15 0.075 0.075 - - - -
Book value, end of period........ 22.89 21.90 22.24 20.90 20.10 20.10 19.56
Average shares outstanding....... 325 325 325 325 325 325 325
PERIOD END BALANCES
Assets........................... $ 55,229 $ 50,602 $ 52,809 $ 46,922 $ 41,360 $ 32,443 $ 26,818
Loans, net....................... 30,373 29,713 29,984 28,587 27,769 20,121 14,213
Securities....................... 19,524 16,481 19,457 13,440 9,205 8,597 6,004
Deposits......................... 47,445 43,149 45,310 40,007 34,718 25,748 20,392
Shareholders' equity............. 7,439 7,116 7,228 6,791 6,533 6,531 6,357
PERFORMANCE RATIOS (1)
</TABLE>

<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets......... 0.67% 0.77% 0.92% 0.58% 0.003% 0.59% 0.005%
Return on average equity......... 4.84 5.57 6.60 3.87 0.015 2.70 0.016
CAPITAL RATIOS
Leverage......................... 13.51% 14.01% 13.56% 14.34% 15.95% 20.06% 24.70%
Risk-based:
Tier 1 capital................ 22.99 23.29 24.41 22.60 21.81 30.57 35.76
Total capital................. 24.09 24.41 25.61 23.66 22.75 31.56 36.53
</TABLE>

(1) Annualized for the nine months ended September 30, 1994 and 1993.
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information of F&M and Potomac giving effect to the
Affiliation under the pooling of interests accounting method is not considered
to be material to the consolidated financial statements of F&M. Accordingly, pro
forma combined financial information is not presented.
THE POTOMAC SPECIAL MEETING
DATE, PLACE AND TIME
The Special Meeting will be held at the Main Office of Potomac located at
230 Herndon Parkway, Herndon, Virginia 22070 on Wednesday, March 29, 1995 at
4:00 p.m., local time.
RECORD DATE
Only shareholders of record at the close of business on February 7, 1995,
(the "Record Date") are entitled to notice of and to vote at the Special Meeting
or any adjournment thereof. At the close of business on the Record Date, Potomac
had outstanding 325,000 shares of Potomac Common Stock outstanding held by 405
shareholders of record.
VOTE REQUIRED
Each share of Potomac Common Stock outstanding on the Record Date entitles
the holder to cast one vote upon each matter properly submitted at the Special
Meeting. The affirmative vote of the holders of more than 70% of the shares of
Potomac Common Stock outstanding as of the Potomac Record Date, in person or by
proxy, is required to approve the Affiliation Agreement.
As of the Record Date, directors and executive officers of Potomac and
their affiliates, persons and entities as a group owned of record and
beneficially a total of approximately 46,400 shares of Potomac Common Stock or
14.3% of the shares of Potomac Common Stock outstanding on such date (exclusive
of shares of Potomac Common Stock subject to outstanding options that are
currently exercisable). Directors and executive officers of Potomac have
indicated an intention to vote their shares of Potomac Common Stock in favor of
the Affiliation.
A failure to vote, either by not returning the enclosed proxy or by
checking the "Abstain" box thereon, will have the same effect as a vote against
approval of the Affiliation Agreement.
VOTING AND REVOCATION OF PROXIES
Shareholders of Potomac are requested to complete, date and sign the
accompanying form of proxy and return it promptly to Potomac in the enclosed
envelope. If a proxy is properly executed and returned in time for voting, it
will be voted as indicated thereon. If a proxy is signed and returned without
indicating any voting instructions, shares of Potomac Common Stock represented
by the proxy will be voted FOR the Affiliation Agreement.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to Potomac by executing and delivering a substitute proxy
to Potomac or by attending the Special Meeting and voting in person. If a
Potomac shareholder desires to revoke a proxy by written notice, such notice
should be mailed or delivered, on or prior to the meeting date, to Thom F.
Hanes, President, Bank of the Potomac, 230 Herndon Parkway, Herndon, Virginia
22070.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Affiliation are not received by Potomac by the
time scheduled for the Special Meeting, the persons named as proxies may propose
one or more adjournments of a meeting to permit continued solicitation of
proxies with respect to such approval. If an adjournment is proposed, unless
contrary instructions are contained in the proxy, the persons named as proxies
will vote in favor of such adjournment those proxies which are entitled to be
voted in favor of the Affiliation and against such adjournment those proxies
containing instructions to vote against approval of the Affiliation. Adjournment
of the meetings will be proposed only

<PAGE>
if the Board Directors of Potomac believes that additional time to solicit
proxies might permit the receipt of sufficient votes to approve the Affiliation,
or at the request of F&M. It is anticipated that any such adjournment would be
for a relatively short period of time, but in no event for more than 120 days.
Any shareholder may revoke such shareholder's proxy during any period of
adjournment in the manner described above.
SOLICITATION OF PROXIES
Potomac will bear the costs of its solicitation of proxies. Solicitations
may be made by mail, telephone, telegraph or personally by directors, officers
and employees at Potomac, none of whom will receive additional compensation for
performing such services. F&M shall pay all of the expenses of printing and
mailing the Proxy Statement/Prospectus.
RECOMMENDATION
The Board of Directors of Potomac has unanimously approved the Affiliation
Agreement and believes that the proposed transaction is fair to and in the best
interests of Potomac and its shareholders. The Board of Directors of Potomac
unanimously recommends that Potomac shareholders vote FOR approval of the
Affiliation Agreement.
In making its recommendation, the Board of Directors of Potomac has
considered, among other things, the opinion of Baxter Fentriss that F&M's
proposal is fair to Potomac shareholders from a financial point of view. See
"The Affiliation - Opinion of Financial Advisor."
THE AFFILIATION
THE FOLLOWING IS A SUMMARY DESCRIPTION OF THE MATERIAL TERMS OF THE
AFFILIATION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AFFILIATION
AGREEMENT WHICH IS ATTACHED AS APPENDIX I HERETO. ALL HOLDERS OF POTOMAC COMMON
STOCK ARE URGED TO READ THE AFFILIATION AGREEMENT IN ITS ENTIRETY.
BACKGROUND OF AND REASONS FOR THE AFFILIATION
Following several Potomac Board of Directors strategic planning sessions in
the spring and summer of 1992, a strategic business plan was developed by the
Potomac Board designed to help Potomac grow and compete in its market. That plan
analyzed the potential of Potomac's existing market, as well as additional and
surrounding markets. It focused on branch banking, possible strategic
acquisitions and affiliations, and the impact of other banking activities
occurring in the marketplace. Based on that plan, the Potomac Board determined
to identify, analyze and pursue strategic acquisition and affiliations which
would create alliances to penetrate additional markets. Primary candidates for
acquisition and affiliation were identified, and the market area in western
Fairfax and eastern Loudoun counties along the Route 7 corridor was also
specified.
Preliminary meetings had been held with several other community banks which
had expressed interest in forming strategic alliances. During 1992 and 1993,
Potomac received expressions of interest from other banks regarding possible
affiliations and acquisitions, but those expressions of interest were overall
not as beneficial to Potomac shareholders as this current F&M proposal. Some of
those overtures were subsequently withdrawn or assessed by Potomac as not
compelling expressions of interest.
Also as part of its strategic business plan, Potomac reviewed and
considered possible acquisitions of branches being sold by the Resolution Trust
Company ("RTC") as well as branches being offered for sale as a result of
consolidations of several larger regional banks in the northern Virginia area.
After being unable to interest another community bank in northern Virginia to
join forces, the Potomac Board determined to expand Potomac's franchise along
the Route 7 corridor and filed an application in February 1994 for a branch
office in the Town of Leesburg. Regulatory approval of that branch was received
in May 1994.
During the spring and summer of 1994, Potomac's Board of Directors
appointed Messrs. Hanes, Green, Mackall and Feldman to a Merger/Acquisition
Subcommittee to review possible affiliations with another candidate which
Potomac had targeted for affiliation. As part of that Subcommittee's work,
Potomac retained Baxter Fentriss to perform a situation analysis for Potomac.
Baxter Fentriss reviewed the strategic costs and benefits of several
alternatives, while at the same time addressing changes in the banking industry
and marketplace. That analysis involved, among other things, such alternatives
as mergers of equals, branch banking, acquisitions by other community and
regional institutions, and staying independent. As a result of the Baxter
Fentriss analysis of Potomac's various options for growth and maximizing
shareholder values, Potomac's Board determined to continue to look for strategic
affiliations with other financial institutions.
In the summer of 1994, Baxter Fentriss advised Potomac's Board that
Potomac's value as a possible acquisition target for other financial
institutions should be more than a one-for-one book value exchange, and that an
affiliation with a regional

<PAGE>
commercial bank may likely produce the best value for Potomac shareholders plus
enhance Potomac's ability to offer more and varied products to Potomac's
customers in a broader marketplace.
Therefore, in late August 1994 the Potomac Board of Directors retained
Baxter Fentriss to solicit, on a confidential basis, indications of interest and
offers from a number of likely financial institutions as to a possible merger
with or acquisition of Potomac. A Confidential Information Memorandum providing
detailed information regarding Potomac was distributed to 17 potential merger
partners, soliciting indications of interest in a strategic merger with Potomac.
In response to the Confidential Information Memorandum, seven financial
institutions submitted preliminary indications of interest to affiliate with
Potomac, all of which were subject to due diligence reviews by the various
parties. Potomac's Board of Directors discussed the relative merits of the
various bids in detail at meetings held with Baxter Fentriss representatives
through the fall of 1994. The Board authorized its management and Baxter
Fentriss to further negotiate with the highest bidder, F&M, to permit F&M to
conduct due diligence of Potomac and Potomac to conduct due diligence of F&M in
order to determine whether or not an affiliation agreement could be reached
between Potomac and F&M. Several Potomac Board of Directors meetings were held
throughout October and November of 1994 with Baxter Fentriss representatives in
order to further discuss the pending proposals and negotiations. Additionally,
prior to finalizing the Affiliation Agreement, the Potomac Board met with the
Chairman and other officers of F&M.
In deciding to enter into the Affiliation Agreement with F&M, the Potomac
Board of Directors considered a number of factors. The Potomac Board did not
assign any relative or specific weights to the factors considered. The material
factors considered included: the higher stock exchange ratio offered by F&M for
Potomac stock (which was higher than any other competing offers); the
marketability of the F&M Common Stock, which is now listed on the NYSE and which
should provide more liquidity to Potomac shareholders; the dividend paid on F&M
Common Stock; the financial condition and history of performance of F&M (a
conservative and strong consolidated balance statement associated with the long
history of increased earnings); the diversification of risk associated with
ownership of an institution with a broader geographic area; the well capitalized
position and earnings of F&M; the tax-free nature of the Affiliation to Potomac
shareholders to the extent they receive F&M Common Stock in exchange for their
Potomac shares; the operational benefits of a combination, including the
management and economic resources available to Potomac from F&M; the ability to
expand Potomac's business into the Route 7 corridor, which it had recognized as
its marketplace in the 1992 Strategic Business Plan; the compatibility of the
managements of the two organizations; and the ability of Potomac to remain a
separate entity with a local Board managing its affairs and ties with the local
community.
The Potomac Board also believes that the additional resources resulting
from the Affiliation will enable Potomac to provide a wider and improved array
of financial services to consumers and businesses and achieve added flexibility
in dealing with a changing competitive environment in its market area. In
addition, the Potomac Board believes that the Affiliation will help provide
Potomac with the financial resources needed to meet competitive challenges
arising from recent and anticipated changes in the banking and financial
services industry. Based upon the review of information and the opinion of
Baxter Fentriss that the terms of the proposed Affiliation are fair to Potomac
shareholders from a financial point of view, the Potomac Board concluded that
the terms of the Affiliation Agreement, which were determined on the basis of
arms-length negotiations, are fair to Potomac shareholders.
Following the Effective Date, none of the directors or officers of Potomac
is expected to serve as a director or officer of F&M. However, pursuant to the
Affiliation Agreement, the directors, officers and employees of Potomac will not
change as a result of the Affiliation, except that F&M will be permitted to
designate one of its officers to serve as a member of Potomac's Board of
Directors from and after the Effective Date. The Affiliation Agreement
notwithstanding, F&M as the sole shareholder of Potomac, will have the power
after the Effective Date to elect the entire Board of Directors of Potomac.
Based on the factors described above, the Board of Directors of Potomac has
unanimously determined that the Affiliation is desirable and is in the best
interests of Potomac and its shareholders, and has approved the Affiliation
Agreement. The Potomac Directors have all committed to vote the Potomac shares
under their control in favor of the Affiliation to the extent of their fiduciary
ability.
THE POTOMAC DIRECTORS UNANIMOUSLY RECOMMEND THAT THE POTOMAC SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE AFFILIATION AGREEMENT.
OPINION OF FINANCIAL ADVISOR
Baxter Fentriss has acted as financial advisor to Potomac in connection
with the Affiliation. Baxter Fentriss previously assisted Potomac in identifying
prospective acquirors. On November 18, 1994, Baxter Fentriss delivered to
Potomac its opinion that as of such date, and on the basis of matters referred
to herein, the Exchange Ratio is fair, from a financial point of view, to the
holders of Potomac Common Stock. In rendering its opinion Baxter Fentriss
consulted with the management

<PAGE>
of Potomac and F&M, reviewed the Affiliation Agreement and certain
publicly-available information on the parties and reviewed certain additional
materials made available by the management of Potomac and the management of F&M.
In addition, Baxter Fentriss discussed with the managements of Potomac and
F&M their respective businesses and outlooks. Baxter Fentriss was involved in
the negotiations with F&M and initiated merger discussions at the request of
Potomac. No limitations were imposed by Potomac's Board of Directors upon Baxter
Fentriss with respect to the investigation made or procedures followed by it in
rendering its opinion. The full text of Baxter Fentriss' written opinion,
updated to the date hereof, is attached as Appendix II to this Proxy
Statement/Prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered, and qualifications
and limitations on the review undertaken by Baxter Fentriss in connection
therewith.
Baxter Fentriss' opinion is directed to Potomac's Board of Directors only,
and is directed only to the fairness, from a financial point of view, of the
Exchange Ratio. It does not address Potomac's underlying business decision to
effect the proposed Affiliation, nor does it constitute a recommendation to any
Potomac shareholder as to how such shareholder should vote with respect to the
Affiliation at the Special Meeting or as to any other matter.
Baxter Fentriss' opinion was one of many factors taken into consideration
by Potomac's Board of Directors in making its determination to approve the
Affiliation Agreement, and the receipt of Baxter Fentriss' opinion is a
condition precedent to Potomac's obligation to consummate the Affiliation.
The opinion of Baxter Fentriss does not address the relative merits of the
Affiliation as compared to any alternative business strategies that might
exist for Potomac or the effect of any other business combination in which
Potomac might engage.
Baxter Fentriss, as part of its investment banking business, is continually
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. Baxter Fentriss is an advisor to firms in the financial
services industry on mergers and acquisitions. Potomac selected Baxter Fentriss
as its financial advisor because Baxter Fentriss is an investment banking firm
focusing on transactions in the Southeastern part of the United States, and
because of the firm's extensive experience and expertise in transactions similar
to the Affiliation. Baxter Fentriss is not affiliated with F&M or Potomac.
In connection with rendering its opinion to Potomac's Board of Directors,
Baxter Fentriss performed a variety of financial analyses. In conducting its
analyses and arriving at its opinion as expressed herein, Baxter Fentriss
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial condition and results of operations of F&M and Potomac,
including interest income, interest expense, interest sensitivity, noninterest
income, noninterest expense, earnings, book value, return on assets and equity,
capitalization, the amount and type of non-performing assets, the impact of
holding certain non-earning real estate assets, the reserve for loan losses and
possible tax consequences resulting from the transaction; (ii) the business
prospects of F&M and Potomac; (iii) the economies of F&M and Potomac's
respective market areas; (iv) the historical and current market for F&M Common
Stock and for the equity securities of certain other banking companies that it
believed to be comparable to F&M; and (v) the nature and terms of certain other
merger transactions that it believed to be relevant. Baxter Fentriss also
considered its assessment of general economic, market, financial and regulatory
conditions and trends, as well as its knowledge of the financial institutions
industry, its experience in connection with similar transactions, its knowledge
of securities valuation generally, and its knowledge of merger transactions in
Virginia and throughout the Southeastern United States.
In connection with rendering its opinion, Baxter Fentriss reviewed (i) the
Affiliation Agreement; (ii) drafts of this Proxy Statement/Prospectus; (iii) the
Annual Reports to Shareholders, including the audited financial statements of
Potomac and F&M for the year ended December 31, 1993; and (iv) certain
additional financial and operating information with respect to the business,
operations and prospects of F&M and Potomac as it deemed appropriate. Baxter
Fentriss also (a) held discussions with members of the senior management of F&M
and Potomac regarding the historical and current business operations, financial
condition and future prospects; (b) reviewed the historical market prices and
trading activity for the F&M Common Stock and compared them with those of
certain publicly traded companies that it deemed to be relevant; (c) compared
the results of operations of F&M and Potomac with those of certain banking
companies that it deemed to be relevant; (d) analyzed the pro forma financial
impact of the Affiliation on F&M; (e) analyzed the pro forma financial impact of
the Affliliation on Potomac; and (f) conducted such other studies, analyses,
inquiries and examinations as Baxter Fentriss deemed appropriate.
The following is a summary of selected analyses performed by Baxter
Fentriss in connection with its opinion.
STOCK PRICE HISTORY. Baxter Fentriss reviewed the trading price and volume
for Potomac Common Stock and compared that to the price offered by F&M. As of
September 30, 1994, the fully diluted book value of Potomac Common Stock was
$22.89 per share.

<PAGE>
COMPARATIVE ANALYSIS. Baxter Fentriss compared the price to earnings
multiple, price to book multiple, and price to assets multiple of the F&M offer
with other comparable merger transactions in Virginia after considering
Potomac's low level of non-performing assets and other variables. The
comparative multiples included both bank and thrift sales during the last 3
years. The proposed price to be paid to Potomac represented a price
significantly above the average multiples paid over that period and one of the
higher prices paid for banks and thrifts in Virginia during such time period.
ANALYSIS OF F&M. Baxter Fentriss evaluated the earnings, book value, and
dividends of F&M Common Stock to be received by Potomac shareholders and
considered the pro forma premium of earnings, book value, and dividends to be
received by the Potomac shareholders. Based on this analysis, Baxter Fentriss
concluded the transaction should have a positive long-term impact on the shares
of F&M Common Stock to be received by Potomac shareholders.
DISCOUNTED CASH FLOW ANALYSIS. Baxter Fentriss performed a discounted cash
flow analysis to determine hypothetical present values for a share of Potomac
Common Stock as a 5 and 10 year investment. Under this analysis, Baxter Fentriss
considered various scenarios for the performance of Potomac's stock using (i) a
range from 0% to 10% in the growth of Potomac's earnings and dividends and (ii)
a range from 6 times to 12 times earnings as the terminal value for Potomac's
stock. A range of discount rates from 10% to 15% were applied to these
alternative growth and terminal value scenarios. These ranges of discount rates,
growth alternatives, and terminal values were chosen based upon what Baxter
Fentriss, in its judgement, considered to be appropriate taking into account,
among other things, Potomac's past and current performance, the general level of
inflation, rates of return for fixed income and equity securities in the
marketplace generally and for companies with similar risk profiles. In all of
the scenarios considered, the present value of a share of Potomac Common Stock
was calculated at less than the $40.00 indicated value of the F&M offer. Thus,
Baxter Fentriss' discounted cash flow analysis indicated that Potomac
shareholders would be in a better financial position by receiving the F&M Common
Stock offered in the Affiliation rather than continuing to hold Potomac Common
Stock.
Using publicly available information on F&M and applying the capital
guidelines of banking regulators, Baxter Fentriss' analysis indicated that the
Affiliation would not seriously dilute the capital and earnings capacity of F&M
and would, therefore, likely not be opposed by the banking regulatory agencies
from a capital perspective. Furthermore, Baxter Fentriss considered the likely
market overlap and the Federal Reserve guidelines with regard to market
concentration and did not believe that the Affiliation would raise antitrust
concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale, were reasonably prepared by management, and reflect their
best current judgements. Baxter Fentriss did not make an independent appraisal
of the assets or liabilities of either Potomac or F&M, and has not been
furnished such an appraisal.
Baxter Fentriss will be paid an amount equal to one and one-quarter percent
(1.25%) of the aggregate consideration to be received by Potomac shareholders in
the Affiliation, plus reasonable out-of-pocket expenses for its services.
Potomac has agreed to indemnify Baxter Fentriss against certain liabilities,
including certain liabilities under the federal securities laws.
TERMS OF THE AFFILIATION
The Affiliation provides for the exchange of each outstanding share of
Potomac Common Stock for F&M Common Stock. F&M will then serve as the parent
bank holding company for Potomac, which will continue to carry on its banking
business in substantially the same manner as before the Affiliation.
At the effective date of the Affiliation, each outstanding share of Potomac
Common Stock will be exchanged for shares of F&M Common Stock with an aggregate
market value of 1.75 times the per share book value of Potomac Common Stock
determined as of the month end immediately preceding the effective date of the
Affiliation (the "Exchange Ratio"), and cash in lieu of any fractional shares.
The amount of cash to be paid to a Potomac shareholder in lieu of issuing any
fractional shares will be equal to the fraction of a share of F&M Common Stock
to which such shareholder would otherwise be entitled multiplied by the average
of the closing prices of F&M Common Stock on the NYSE during the ten trading
days immediately preceding the Effective Date. Although the number of shares of
F&M Common Stock that will be issued pursuant to the Exchange Ratio cannot be
determined until the Effective Date, based on the closing price of F&M Common
Stock on the NYSE of $16.00 per share on February 9, 1995 and the book value per
share of Potomac Common Stock of $22.89 at September 30, 1994, each share of
Potomac Common Stock would be exchanged for 2.50 shares of F&M Common Stock,
with a cash payment in lieu of issuing any fractional share.
In addition, each stock option issued by Potomac pursuant to the Potomac
Stock Option Plans (allowing holders to acquire an aggregate of up to 44,400
shares of Potomac Common Stock as of December 31, 1994) outstanding at the
Effective Date shall cease to be outstanding and will be exchanged for shares of
F&M Common Stock. The shares of F&M Common Stock issued in exchange for the
stock options will have an aggregate market value (determined as described
<PAGE>
above) equal to the so-called equity represented by each stock option, which is
measured as the difference between the original per share exercise price of the
stock option and 1.75 times the per share book value of Potomac Common Stock as
of the month end immediately preceding the effective date of the Affiliation.
Cash will be paid in lieu of issuing any fractional share.
Shareholders of Potomac are entitled to exercise their dissenters' rights
with respect to the Affiliation. See "The Affiliation - Rights of Dissenting
Shareholders."
EFFECTIVE DATE
If the Affiliation is approved by the requisite vote of the shareholders of
Potomac and by the Federal Reserve and the Virginia SCC (See "The Affiliation
Regulatory Approvals") and other conditions to the Affiliation are satisfied (or
waived to the extent permitted by applicable law), the Affiliation will be
consummated and effected at the time a certificate of share exchange is issued
by the Virginia SCC pursuant to the Virginia SCA. See "The Affiliation -
Representations and Warranties; Conditions to the Affiliation."
It is anticipated that the Potomac Effective Date will occur during the
early part of the second quarter of this year.
SURRENDER OF STOCK CERTIFICATES
Promptly after the Potomac Effective Date, F&M Bank-Winchester, as the
exchange agent, will mail to the holders of Potomac Common Stock immediately
prior to the Effective Date a letter of transmittal and instructions relating to
the exchange of their Potomac certificates for certificates representing the
number of shares of F&M Common Stock into which their Potomac Common Stock has
been converted as a result of the Affiliation.
POTOMAC SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for Potomac Common
Stock, together with a properly completed letter of transmittal, the holder of
such certificates will receive a certificate or certificates representing the
number of shares of F&M Common Stock to which he is entitled and, where
applicable, a check for the amount payable in cash in lieu of issuing a
fractional share. Lost, stolen, mutilated or destroyed certificates will be
treated in accordance with the existing procedures of F&M.
All F&M Common Stock issued as a result of the conversion of Potomac Stock
pursuant to the Affiliation will be deemed issued as of the Effective Date.
After the Effective Date, Potomac shareholders will be entitled to vote the
number of shares of F&M Common Stock into which their Potomac Common Stock has
been converted, regardless of whether they have surrendered their Potomac
certificates. The Affiliation Agreement provides, however, that no dividend or
distribution payable to the holders of record of F&M Common Stock at or as of
any time after the Effective Date will be paid to the holder of any Potomac
certificate until such holder physically surrenders such certificate, promptly
after which time all such dividends or distributions will be paid (without
interest).
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE AFFILIATION
The Affiliation Agreement contains representations and warranties by F&M
and Potomac regarding, among other things, their respective organizations,
authorizations to enter into the Affiliation Agreement, capitalization,
financial statements and pending and threatened litigation. These
representations and warranties (except as otherwise provided in the Affiliation
Agreement) will not survive the Effective Date.
The obligations of F&M and Potomac to consummate the Affiliation are
subject to the following conditions, among, others: approval and adoption of the
Affiliation Agreement by the requisite shareholder votes; receipt of all
necessary regulatory approvals not conditioned or restricted in a manner that,
in the judgment of the Boards of Directors of F&M and Potomac, materially
adversely affects the economic or business benefits of the Affiliation so as to
render inadvisable consummation thereof; the absence of certain actual or
threatened proceedings before a court or other governmental body relating to the
Affiliation; receipt of a current fairness opinion from Baxter Fentriss; and the
receipt of an opinion of counsel as to certain Federal income tax consequences
of the Affiliation. Also, under the terms of the Affiliation Agreement, F&M
agreed that, following the effective date, it will indemnify those persons
associated with Potomac and its subsidiaries who are entitled to indemnification
as of the effective date of the Affiliation.
In addition, each party's obligation to effect the Affiliation, unless
waived, is subject to performance by the other party of its obligations under
the Affiliation Agreement, the accuracy, in all material respects, of the
representations and warranties of the other party contained therein, and the
receipt of certain opinions and certificates from the other party.
REGULATORY APPROVALS

<PAGE>
F&M's application to acquire Potomac pursuant to the Affiliation is subject
to approval by the Federal Reserve under the BHC Act, which requires that the
Federal Reserve take into consideration the financial and managerial resources
and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. The BHC Act prohibits the
Federal Reserve from approving the Affiliation if it would result in a monopoly
or if it would be in furtherance of any combination or conspiracy to monopolize
or to attempt to monopolize the business of banking in any part of the United
States, or if its effect may be substantially to lessen competition or to tend
to create a monopoly, or if it would be in any other manner a restraint of
trade, unless the Federal Reserve finds that the anti-competitive effects of the
Affiliation are clearly outweighed in the public interest by the probable effect
of the transaction in meeting the convenience and needs of the communities to be
served. The Affiliation may not be consummated for 30 days after such approval,
pursuant to federal law, in order to provide a period for the Affiliation to be
challenged under the antitrust laws.
The BHC Act provides for the publication of notice and the opportunity for
administrative hearings relating to the applications, and it authorizes the
regulatory agency to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could
substantially delay the regulatory approvals required for consummation of the
Affiliation.
The Affiliation is further subject to the approval of the Bureau of
Financial Institutions of the Virginia SCC. To obtain such approval, the
Virginia SCC must conclude that the Affiliation will not affect detrimentally
the safety or soundness of a Virginia bank.
Applications for approval of the Affiliation have been filed with the
Federal Reserve and the Virginia SCC, and neither agency has responded yet to
the applications. F&M and Potomac are not aware of any other governmental
approvals or actions that are required for consummation of the Affiliation,
except as described above. Should any such approval or action be required, it is
currently contemplated that such approval or action would be sought. There can
be no assurance that any such approval or action, if needed, could be obtained.
BUSINESS PENDING THE AFFILIATION
Until consummation of the Affiliation (or termination of the Affiliation
Agreement), Potomac is obligated to operate its businesses only in the ordinary
and usual course, consistent with past practice and to use its best efforts to
maintain its business organizations, employees and business relationships and
retain the services of its officers and key employees. Until consummation of the
Affiliation (or termination of the Affiliation Agreement) Potomac may not,
without the consent of F&M, among other things: (a) declare or pay additional
dividends on its capital stock, except for an annual cash dividend in an amount
not to exceed $0.15 per share (in view of the pricing of this transaction which
is tied to the book value of Potomac Common Stock as of the month end preceding
the Effective Date, the Potomac Board of Directors has determined not to pay a
dividend pending consummation of the Affiliation); (b) enter into any merger,
consolidation or business combination (other than the Affiliation) or any
acquisition or disposition of a material amount of assets or securities or
solicit proposals in respect thereof; (c) amend its charter or bylaws ; (d)
issue any capital stock, except upon exercise of rights or options issued
pursuant to existing employee benefits plans, programs or arrangements or effect
any stock split or otherwise change its capitalization; or (e) purchase or
redeem any of its capital stock.
WAIVER, AMENDMENT AND TERMINATION
At any time on or prior to the Potomac Effective Date, any term or
condition of the Affiliation may be waived by the party which is entitled to the
benefits thereof, without shareholder approval, to the extent permitted under
applicable law. The Affiliation Agreement may be amended at any time prior to
the Effective Date by agreement of the parties whether before or after the
Special Meeting (except that the Exchange Ratio shall not be changed after
approval of the affiliation agreement by the shareholders). any material change
in a material term of the Affiliation Agreement would require a resolicitation
of Potomac's shareholders. Such a material change would include, but not be
limited to, a change in the tax consequences to Potomac's shareholders.
The Affiliation Agreement may be terminated by F&M or Potomac, whether
before or after the approval of the Affiliation Agreement by the shareholders:
(a) if the other party materially breaches any representation, warranty or
agreement which is not properly cured by such breaching party; (b) if the
Affiliation is not consummated by August 31, 1995; or (c) if the Federal Reserve
or the Virginia SCC have denied approval. The Affiliation Agreement also may be
terminated at any time by the mutual consent of F&M and Potomac. In the event of
termination, the Affiliation Agreement shall become null and void, except that
certain provisions thereof relating to expenses and confidentiality of
information exchanged between the parties shall survive any such termination.

RESALES OF F&M COMMON STOCK

<PAGE>
All shares of F&M Common Stock received by Potomac shareholders in
connection with the Affiliation will be freely transferable, except that F&M
Common Stock received by persons who are deemed to be "affiliates" (as such term
is defined in Rule 144 under the Securities Act) of Potomac may be resold by
them only in transactions permitted by the resale provisions of Rule 145 under
the 1933 Act. For purposes of Rule 144 as applied to Potomac, the directors and
executive officers of Potomac are the only affiliates who will be subject to the
resale limitations.
ACCOUNTING TREATMENT
It is anticipated that the Affiliation will be accounted for as a pooling
of interests for accounting and financial reporting purposes. Under this method
of accounting, recorded assets and liabilities of F&M and Potomac are carried
forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Potomac for the entire fiscal year
in which the Affiliation occurs, and the reported income of the separate
corporations for prior periods will be combined. No recognition of goodwill in
the combination is required of any party to the Affiliation.
For the Affiliation to qualify as a pooling of interests, it must satisfy
certain conditions, including the condition that the total cash paid by F&M
pursuant to the Affiliation Agreement for (a) fractional shares and (b) all the
Potomac Common Stock held by dissenting stockholders, may not exceed 10% of the
value of the Potomac Common Stock at the Effective Date. In addition, affiliates
of F&M and Potomac must agree that, among other things, they will not sell any
F&M Common Stock or Potomac Common Stock within 30 days prior to the Effective
Date, nor sell any F&M Common Stock until such time as F&M has published
financial results covering at least 30 days of the combined operations of F&M
and Potomac after the Affiliation.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
The Affiliation Agreement provides that following the Effective Date, F&M
shall indemnify any person with respect to matters occurring on or prior to the
Effective Date who has rights to indemnification from Potomac, to the same
extent and on the same conditions as in effect on the date of the Affiliation
Agreement. F&M has also agreed to use its reasonable best efforts to maintain
Potomac's existing directors' and officers' liability policy, or another policy
providing at least comparable coverage, covering persons who are currently
covered by such insurance of Potomac for a period of three years after the
Effective Date on terms no less favorable than those on the date of the
Affiliation Agreement. The Affiliation Agreement also contains provisions
concerning employee benefits after the Affiliation.
CERTAIN FEDERAL INCOME TAX MATTERS
F&M and Potomac have received an opinion from LeClair, Ryan, Joynes, Epps &
Framme, P.C. ("LeClair, Ryan"), counsel to F&M, to the effect that for federal
income tax purposes:
1. The Affiliation will constitute a reorganization within the meaning of
Section 368 of the Code;
2. No gain or loss will be recognized by F&M or Potomac as a result of the
Affiliation;
3. No gain or loss will be recognized by a Potomac shareholder to the
extent he receives F&M Common Stock solely in exchange for his Potomac Common
Stock pursuant to the Affiliation;
4. The tax basis of the F&M Common Stock received by each Potomac
shareholder will be the same as the tax basis of the Potomac stock surrendered
in exchange therefor, and
5. The holding period for each share of F&M Common Stock received by each
Potomac shareholder in exchange for Potomac Common Stock will include the period
for which such shareholder held the Potomac Common Stock exchanged therefore,
provided such Potomac Common Stock is a capital asset in the hands of such
holder at the Effective Date.
The opinion from LeClair, Ryan has been filed as an exhibit to the
Registration Statement, and receipt of substantially the same opinion as of the
Effective Date is a non-waivable condition to consummation of the Affiliation.
The opinion from LeClair, Ryan is based on, and the opinion to be given at the
Effective Date will be based on, certain customary assumptions and
representations regarding, among other things, the lack of previous dealings
between F&M and Potomac, the existing and future ownership of Potomac and F&M
Common Stock and the future business plans of F&M.
Any cash received by shareholders, whether as a result of an exercise of
their dissenters' rights or in lieu of the issuance of fractional shares, could
result in taxable income to the shareholders. The receipt of such cash generally
will be treated as a sale or exchange of the stock resulting in capital gain or
loss measured by the difference between the cash received and an allocable
portion of the basis of the stock relinquished. The receipt of such cash may be
treated as a dividend and taxed as ordinary income in certain limited
situations. In the case of cash payments in lieu of fractional shares, however,
such payments will be small in amount and not a material concern to Potomac
shareholders. Shareholders should consult their own tax advisors concerning
proper treatment of such cash amounts.

<PAGE>
THE PRECEDING DISCUSSION SUMMARIZES FOR GENERAL INFORMATION THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE AFFILIATION TO POTOMAC SHAREHOLDERS. IT
DOES NOT DISCUSS ALL POTENTIALLY RELEVANT FEDERAL INCOME TAX MATTERS OR
CONSEQUENCES TO ANY FOREIGN OR OTHER SHAREHOLDERS SUBJECT TO SPECIAL TAX
TREATMENT, NOR DOES IT DISCUSS, AND NO OPINION HAS BEEN REQUESTED REGARDING, ANY
STATE OR LOCAL TAX CONSEQUENCES OF THE AFFILIATION. THE TAX CONSEQUENCES TO ANY
PARTICULAR SHAREHOLDER MAY DEPEND ON THE SHAREHOLDER'S CIRCUMSTANCES. POTOMAC
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES.
RIGHTS OF DISSENTING SHAREHOLDERS
A shareholder of Potomac Common Stock who objects to the Affiliation (a
"Dissenting Shareholder") and who complies with provisions of Article 15 of
Title 13.1 of the Virginia SCA ("Article 15") may demand the right to receive a
cash payment, if the Affiliation is consummated, for the fair value of his or
her stock immediately before the Affiliation Effective Date, exclusive of any
appreciation or depreciation in anticipation of the Affiliation unless such
exclusion would be inequitable. In order to receive payment, a Dissenting
Shareholder must deliver to Potomac prior to the Special Meeting a written
notice of intent to demand payment for his or her shares if the Affiliation is
effectuated (an "Intent to Demand Payment") and must not vote his or her shares
in favor of the Affiliation. The Intent to Demand Payment should be addressed
to, Thom F. Hanes, President, Bank of the Potomac, 230 Herndon Parkway, Herndon,
Virginia 22070 A VOTE AGAINST THE AFFILIATION WILL NOT ITSELF CONSTITUTE SUCH
WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE
OF INTENT TO DEMAND PAYMENT.
A shareholder of record of Potomac Common Stock may assert dissenters'
rights as to fewer than all the shares registered in his or her name only if the
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies Potomac in writing of the name and address of each person on
whose behalf he asserts dissenters' rights. The rights of such a partial
dissenter are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders. A beneficial
shareholder of Potomac Common Stock may assert dissenters' rights as to shares
held on his behalf by a shareholder of record only if (i) he submits to Potomac
the record shareholder's written consent to the dissent not later than the time
when the beneficial shareholder asserts dissenters' rights, and (ii) he dissents
with respect to all shares of which he is the beneficial shareholder or over
which he has power to direct the vote.
Within 10 days after the Effective Date, Potomac is required to deliver a
notice in writing (a "Dissenter's Notice") to each Dissenting Shareholder who
has filed an Intent to Demand Payment and who has not voted such shares in favor
of the Affiliation. The Dissenter's Notice shall (i) state where the demand for
payment (the "Payment Demand") shall be sent and where and when stock
certificates shall be deposited; (ii) supply a form for demanding payment; (iii)
set a date by which Potomac must receive the Payment Demand; and (iv) be
accompanied by a copy of Article 15. A Dissenting Shareholder who is sent a
Dissenter's Notice must submit the Payment Demand and deposit his or her stock
certificates in accordance with the terms of, and within the time frames set
forth in, the Dissenter's Notice. As a part of the Payment Demand, the
Dissenting Shareholder must certify whether he or she acquired beneficial
ownership of the shares before or after the date of the first public
announcement of the terms of the proposed Affiliation (the "Announcement Date"),
which was November 18, 1994. Potomac will specify the Announcement Date in the
Dissenter's Notice.
Except with respect to shares acquired after the Announcement Date, Potomac
shall pay a Dissenting Shareholder the amount Potomac estimates to be the fair
value of his or her shares, plus accrued interest. Such payment shall be made
within 30 days of receipt of the Dissenting Shareholder's Payment Demand. As to
shares acquired after the Announcement Date, Potomac is only obligated to
estimate the fair value of the shares, plus accrued interest, and to offer to
pay this amount to the Dissenting Shareholder conditioned upon the Dissenting
Shareholder's agreement to accept it in full satisfaction of his or her claim.
If a Dissenting Shareholder believes that the amount paid or offered by
Potomac is less than the fair value of his or her shares, or that the interest
due is incorrectly calculated, that Dissenting Shareholder may notify Potomac of
his or her own estimate of the fair value of his shares and amount of interest
due and demand payment of such estimate (less any amount already received by the
Dissenting Shareholder) (the "Estimate and Demand"). The Dissenting Shareholder
must notify Potomac of the Estimate and Demand within 30 days after the date
Potomac makes or offers to make payment to the Dissenting Shareholder.
Within 60 days after receiving the Estimate and Demand, Potomac must either
commence a proceeding in the appropriate circuit court to determine the fair
value of the Dissenting Shareholder's shares and accrued interest, or Potomac
must pay each Dissenting Shareholder whose demand remains unsettled the amount
demanded. If a proceeding is commenced, the court must determine all costs of
the proceeding and must assess those costs against Potomac, except that the
court may assess costs against all or some of the Dissenting Shareholders to the
extent the court finds that the Dissenting Shareholders did not act in good
faith in demanding payment of the Dissenting Shareholder's Estimates.

<PAGE>
The foregoing discussion is a summary of the material provisions of Article
15. Shareholders are strongly encouraged to review carefully the full text of
Article 15, which is included as Appendix III to this Proxy
Statement/Prospectus. The provisions of Article 15 are technical and complex,
and a shareholder failing to comply strictly with them may forfeit his
Dissenting Shareholder's rights. Any shareholder who intends to dissent from the
Affiliation should review the full text of those provisions carefully and also
should consult with his attorney. No further notice of the events giving rise to
dissenters rights or any steps associated therewith will be furnished to Potomac
shareholders, except as indicated above or otherwise required by law.
Any Dissenting Shareholder who perfects his right to be paid the fair value
of his shares will recognize gain or loss, if any, for federal income tax
purposes upon the receipt of cash for his shares. The amount of gain or loss and
its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code. See "The
Affiliation - Certain Federal Income Tax Consequences."
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Both F&M and Potomac are corporations subject to the provisions of the
Virginia SCA. Shareholders of Potomac, whose rights are governed by Potomac's
Articles of Incorporation and Bylaws, will, upon consummation of the
Affiliation, become shareholders of F&M. The rights of the former Potomac
shareholders will then be governed by the Articles of Incorporation and Bylaws
of F&M.
There are no material differences between the rights of a Potomac
shareholder under Potomac's Articles of Incorporation and Bylaws, on the one
hand, and the rights of an F&M shareholder under the Articles of Incorporation
and Bylaws of F&M, on the other hand, except as disclosed in the section
"Comparative Rights of Shareholders."
EXPENSES OF THE AFFILIATION
Whether or not the Affiliation is consummated, Potomac and F&M will pay
their own expenses incident to preparing, entering into and carrying out the
Affiliation Agreement, preparing and filing the Registration Statement of which
this Proxy Statement/Prospectus is a part, except under circumstances involving
willful breaches of certain provisions of the Affiliation Agreement. In general,
the Affiliation Agreement provides for each party to pay its own expenses in
this regard.
If, however, either party materially breaches the Affiliation Agreement,
that party must pay the costs associated with this transaction incurred by the
non-breaching party. If Affiliation Agreement is terminated by Potomac because
it is not approved by the Potomac shareholders, Potomac must pay 50% of F&M's
costs in this transaction, provided that the maximum amount that Potomac may be
responsible to F&M for shall be limited to $50,000.
Potomac and F&M have incurred and will continue to incur expenses related
to the Affiliation, which expenses include, among other things, legal fees,
filing fees, accounting fees, investment banking fees, printing charges and
costs of mailing.
MARKET PRICES AND DIVIDENDS
Since December 28, 1994, F&M Common Stock has been listed for trading on
the NYSE under the symbol "FMN". Prior thereto, F&M Common Stock was traded in
the over-the-counter market and quoted on the Nasdaq/NMS under the symbol
"FMNT". The market value of F&M Common Stock on November 17, 1994, the last
full trading day preceding the public announcement of the execution of the
Affiliation Agreement and based on last reported sale price of F&M Common Stock
on the Nasdaq/NMS, was $16.25 per share. The market value of F&M Common Stock on
February 9, 1995, the latest practicable date prior to the date of the Proxy
Statement/Prospectus and based on the closing price on the NYSE
Composite Transactions List, was $16.00 per share.
The following table reflects the high and low closing sale prices for F&M
Common Stock as quoted on the Nasdaq/NMS for the periods indicated through
December 27, 1994, after which time the stock was listed for trading on the
NYSE.
The following table also shows the amount of actual dividends paid during
each quarter, which varies for certain periods from the dividends declared
during the quarter in cases where the dividend was paid in the quarter
following its declaration. The amounts shown have not been restated and
adjusted to reflect the acquisition on July 1, 1994 of both PNB Financial
Corporation and Hallmark Bank and Trust Company and a 2.5% stock dividend
effective September 1, 1994. See "Selected Financial Data" for such restated
dividend information.

<PAGE>
<TABLE>
<CAPTION>
PER SHARE
HIGH LOW DIVIDENDS
<S> <C> <C> <C>
1992:
1st quarter.................................... $12.00 $ 9.75 $ 0.130
2nd quarter.................................... 12.75 11.25 0.130
3rd quarter.................................... 13.75 12.25 0.135
4th quarter.................................... 17.25 12.00 0.140
$ 0.535
1993:
1st quarter.................................... $17.25 $15.38 $ 0.140
2nd quarter.................................... 16.50 13.75 0.140
3rd quarter.................................... 16.75 14.25 0.140
4th quarter.................................... 16.50 14.75 0.145
$ 0.565
1994:
1st quarter.................................... $16.50 $15.75 $ 0.145
2nd quarter.................................... 16.25 15.50 0.145
3rd quarter.................................... 17.37 16.00 0.145
4th quarter.................................... 17.25 14.75 0.150
$ 0.585
1995:
1st quarter (through Feb. 9).................. $16.50 $15.25 $ 0.150
</TABLE>

There is no active public market for Potomac Common Stock. It is not listed
on a registered exchange or quoted on the Nasdaq system, and trades in Potomac
Common Stock occur infrequently on a local basis. The following table shows for
periods indicated the high and low sales prices of which Potomac has knowledge
and the per share dividends declared during the respective periods. Quarterly
information is not readily available. The last sale of Potomac Common Stock
prior to the public announcement of the execution of the Affiliation Agreement
of which Potomac has knowledge occurred on October 18, 1994, and involved the
sale of 500 shares at $21 per share. The last sale of Potomac Common Stock of
which Potomac has knowledge occurred on December 29, 1994 and involved the sale
of 1,000 shares at $32 per share.
<TABLE>
<CAPTION>
YEARS SHARES TRADED HIGH LOW DIVIDENDS
<S> <C> <C> <C> <C>
1992 1,000 $18 $18 $ -0-
1993 6,200 18 18 0.075
1994 14,748 32 18 0.150
</TABLE>

As of September 30, 1994, there were 7,518 record holders of F&M Common
Stock and 405 record holders of Potomac Common Stock.
The future payment of dividends is solely in the discretion of the Board of
Directors of Potomac and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of Potomac and such
other factors as Potomac's Board of Directors may, from time to time, deem
relevant. In view of the pricing of this transaction which is tied to the book
value of Potomac Common Stock as of the month end preceding the Effective Date,
the Potomac Board of Directors has determined not to pay a dividend pending
consummation of the Affiliation.
F&M or F&M Bank-Winchester has paid regular cash dividends for more than 50
consecutive years. F&M historically has paid cash dividends on a quarterly
basis, together with a special cash and/or stock dividend in the fourth quarter
of each year depending upon F&M's performance that year. In 1992, F&M adopted a
practice of increasing its regular fourth quarter dividend based on F&M's
performance, with the intention of paying an equivalent amount for the first
three quarters of each following year.
F&M is a legal entity separate and distinct from its subsidiaries, and its
revenues depend primarily on the payment of dividends from its subsidiary banks.
F&M's subsidiary banks are subject to certain legal restrictions on the amount
of dividends they are permitted to pay to F&M. For example, a Virginia chartered
bank, of which there are eight within the F&M system, is prohibited from paying
a dividend that would impair its paid-in capital. In addition, the Virginia SCC
may limit the
28

<PAGE>
payment by any Virginia chartered bank if it determines that the limitation is
in the public interest and is necessary to ensure the bank's financial
soundness.
Under current federal law, insured depository institutions, such as the
Subsidiary Banks, are prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the institution
would become "undercapitalized" (as such term is defined in federal law). Based
on the Subsidiary Banks current financial condition, F&M does not expect that
this provision will have any impact on its ability to obtain dividends from its
insured depository institution subsidiaries.
As a result of these legal restrictions, there can be no assurance that
dividends would be paid in the future by F&M's bank subsidiaries. The final
determination of the timing, amount and payment of dividends on F&M Common Stock
is at the discretion of F&M's Board of Directors and will depend upon the
earnings of F&M and its subsidiaries, principally its subsidiary banks, the
financial condition of F&M and other factors, including general economic
conditions and applicable governmental regulations and policies.
BUSINESS OF POTOMAC
BUSINESS
Potomac was incorporated under the laws of Virginia on October 22, 1987. It
commenced its banking business in the fall of 1988.
Potomac conducts a general commercial and full service retail banking
business. Potomac is a local bank with a local, personal focus. It provides
banking services to individuals, corporations, and others as well as services
through correspondent banks and other special services. Potomac offers a variety
of transaction accounts, time and savings accounts, as well as Individual
Retirement Accounts and Christmas Club Accounts. In the loan division, Potomac
offers commercial, residential, personal, construction, and real estate loans.
In addition to the services listed above, Potomac offers other related services
such as bank-by mail, U.S. Savings Bonds, and the rental of safe deposit
facilities.
Potomac has one office location, which is its Main Office located at 230
Herndon Parkway, Herndon, Virginia. The office has a drive-up teller window, a
24-hour automatic banking terminal and night depository on premises. The primary
service area of Potomac is western Fairfax County and eastern Loudoun County.
Potomac competes with large and small commercial banks, as well as other
financial institutions in its market.
Potomac is subject to regulation and examination by the Virginia State
Corporation Commission, the Federal Reserve, and the Federal Deposit Insurance
Corporation. Various requirements and restrictions under federal and state law
affect the operations of Potomac, including the requirement to maintain reserves
against deposits, restrictions on the nature and amount of loans which may be
made and the interest that may be charged thereon, and restrictions relating to
investments and other activities of Potomac.
Potomac employed 23 full-time and 9 part-time persons at December 31, 1994.
LENDING ACTIVITIES
LOAN PORTFOLIO. Potomac is a residential construction lender and extends
commercial loans to small and medium sized businesses within its primary service
area. Its lending activity extends across it primary service area of western
Fairfax County and eastern Loudoun County, Virginia. Consistent with its focus
on providing community-based financial services, Potomac does not attempt to
diversify its loan portfolio geographically by making significant amounts of
loans to borrowers outside of its primary service area. The principal economic
risk associated with each of the categories of loans in the portfolio is the
creditworthiness of its borrowers. Within each category, such risk is increased
or decreased depending on prevailing economic conditions. In an effort to manage
this risk, Potomac's policy gives loan amount approval limits to individual loan
officers based on their levels of experience. The risk associated with
installment loans to individuals varies based upon employment levels, consumer
confidence, and other conditions that affect the ability of consumers to repay
indebtedness. The risk associated with commercial, financial and agricultural
loans varies based upon the strength and activity of the local economies of
Potomac's market area. The risks associated with residential real estate
construction loans include the permanent lender's ability to meet its loan
commitments and changes in the borrower's financial or credit condition during
the construction period, among other factors.
29

<PAGE>
RESIDENTIAL CONSTRUCTION LENDING. Potomac makes residential construction
loans for owner occupied residences. Such residential construction loans are
secured by a lien on the property, a first lien in the case of initial
construction and a second lien with respect to improvements to an existing home.
These loans normally carry an interest rate of 1.0% to 2.0% over the prime bank
lending rate, adjusted daily. The uncertain value of homes under construction
contributes to the risks associated with residential construction lending. A
residential construction loan is subject to the additional risk of the permanent
lender failing to provide the necessary funds at closing, either due to the
borrower's inability to fulfill the terms of his commitment or due to the
permanent lender's inability to meet its funding commitments.
COMMERCIAL REAL ESTATE LENDING. Although Potomac does not originate
construction loans on income producing properties such as shopping centers,
hotels and office buildings, Potomac does provide so called 'mini-perm'
financing on such properties, as well as residential properties. These are three
to five-year balloon loans amortized on a fifteen to thirty year basis. This
type of loan is generally utilized as a bridge between construction and longer
term permanent financing. The risks of mini-permanent loans are similar to those
of true permanent financings, but also include the risk that the borrower will
be unable to obtain permanent financing and repay the mini-permanent debt.
CONSUMER LENDING. Potomac currently offers most types of consumer demand,
time and installment loans, including automobile loans and home equity lines of
credit.
COMMERCIAL BUSINESS LENDING. As a full-service community bank, Potomac
makes commercial loans to qualified small businesses in its market area.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans but have commensurately higher yields. To manage
these risks, Potomac secures appropriate collateral and carefully monitors the
financial condition of its business borrowers and the concentration of such
loans in its portfolio. Potomac generally requires the personal guarantee(s) of
the business principals and often takes personal assets (e.g. lien on residence
of principal) as additional collateral. Residential mortgage loans generally are
made on the basis of the borrower's ability to repay the loan from his
employment and other income and are secured by real property whose value tends
to be easily ascertainable. In contrast, commercial business loans typically are
made on the basis of the borrower's ability to repay the loan from cash flow of
its business and are either unsecured or secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability of
funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the collateral for
secured commercial business loans may depreciate over time, and cannot be
appraised with as much precision as residential real estate.
OWNERSHIP OF POTOMAC COMMON STOCK
The following table sets forth, as of February 7, 1995, certain information
as to the shares of Potomac Common Stock beneficially owned by the Potomac
directors individually and by all directors and executive officers of Potomac as
a group.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NATURE OF POTOMAC
BENEFICIAL COMMON STOCK
NAME OWNERSHIP(1)(2) OUTSTANDING
<S> <C> <C>
Daniel R. Baker.............................................................................. 7,810(3) 2.4%
David E. Feldman............................................................................. 22,250 6.7%
Howard R. Green.............................................................................. 12,650 3.8%
Thom F. Hanes................................................................................ 7,933 2.4%
Norman P. Horn............................................................................... 6,850 2.1%
Henry C. Mackall............................................................................. 8,800 2.7%
Thomas D. Rust............................................................................... 11,250(4) 3.4%
Robert E. Sevila............................................................................. 6,850 2.1%
All Directors and Executive Officers as a Group (8 persons).................................. 84,393(2) 23.1%
</TABLE>

(1) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 under the Securities Act. Under
this rule, in general, a person is deemed to be the beneficial owner of
security if he has or shares the power to vote or direct the voting of the
security or the power to dispose or direct the disposition of the security,
of if he has the right to acquire beneficial ownership of the security
within 60 days.
(2) Includes 5,000 shares that may be acquired by each director pursuant to the
exercise of stock options granted under the 1989 Director Stock Option Plan,
and 40,500 shares for all directors and executive officers as a group.
(3) Includes 1,750 shares owned by the SugarOak Corporation Profit Sharing Plan
Trust for which Mr. Baker is the trustee.
30

<PAGE>
(4) Includes 1,000 shares beneficially owned by Mr. Rust's wife, Patsy Rust, who
is also Vice President-Branch Administration of Potomac.
Except for Mr. Feldman, whose beneficial ownership is shown in the table
above, there are no other Potomac shareholders known by Potomac who beneficially
own more than 5% of the outstanding shares.
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 Potomac. This discussion and analysis should be read in conjunction
with Financial Statements and Notes thereto included elsewhere in this Proxy
Statement Prospectus.
OVERVIEW
Potomac's performance for 1993 showed improvement over the previous year,
although economic conditions were still weak. Net income increased 78.7% in 1993
to $461,695, compared with $258,333 earned in 1992, with 1993 earnings per share
increasing to $1.42 per share compared to $0.79 per share for 1992. The
increased earnings for 1993 were primarily due to higher levels of net interest
income and a reduction in the provision for loan losses.
Return on average equity increased during 1993 to 6.59%, up from 3.87% for
the prior year. Return on average assets also increased during 1993 to 0.93%,
compared to 0.58% for 1992.
Net interest margin remained stable during 1993 at 4.82% on a
tax-equivalent basis, compared to 4.83% in 1992. Net interest margin for 1991
was 4.66%. While loan demand continued to be weak through these years, improved
yields from investments in securities and reduced cost of funds were the
principal factors causing the upward trend in Potomac's net interest margin
during this period.
Loans, net of unearned income and allowance for possible loan losses, were
$29.98 million at December 31, 1993. Loan demand has been weak since 1991 as
evidenced by 8% growth in net loans from December 31, 1991 to December 31, 1993.
As a result of the continuing weak loan demand, Potomac has increasingly
invested deposit funds in high-quality securities. At December 31, 1993,
Potomac's securities portfolio represented 38% of total earning assets and had
increased in size by 111.37% over the level at December 31, 1991.
NET INTEREST INCOME
Net interest income represents the principal source of earnings for
Potomac. Net interest income equals the amount by which interest income exceeds
interest expense. 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 was $2.3 million for the year ended December 31, 1993,
up 13.5% over the $2.06 million reported for 1992. As loan demand remained
relatively flat, the improvement in net interest income primarily was due to
increases in the size of the securities portfolio and a favorable interest rate
environment. The average balance of the securities portfolio was $15.6 million
for 1993, up $5.5 million over the average balance 1992. Also contributing to
the improvement in net interest income was a decline in total interest expense
of $144,643 in 1993 compared to 1992. The decline in interest expense was due to
lower interest rates, which offset the effect of a $4.6 million increase in
interest-bearing liabilities during 1993. While the tax equivalent yield on
interest-earning assets declined 74 basis points from 8.19% during 1992 to 7.45%
for 1993, net interest margin varied only slightly during that period due to a
similar decrease in total funding costs, which fell 88 basis points from 4.15%
during 1992 to 3.27% for 1993. The decline in the yield on interest-earning
assets and total funding costs was due to lower interest rate levels during 1993
than during 1992. The decrease in funding costs during 1993, along with the
above mentioned decrease in the yield, contributed to a minimal variation in net
interest margin on a tax-equivalent basis, to 4.82% compared to 4.83% for 1992.
Net interest income for 1992 was $2.06 million, compared to $1.7 million
for 1991. Average earning assets increased in 1992 by $6.6 million, or 18.6%,
over 1991. This increase was attributable to an increase in both securities and
loans. Lower interest yields contributed to a decrease of 74 basis points in the
yield on earning assets. For 1993, the lower net interest margin was due to a
almost identical decrease in the yield on earning assets and the decrease in the
cost of funds.
For 1992, net interest income increased $376,302 over the prior year, due
primarily to an increase in loans.
31

<PAGE>
The following table sets forth Potomac's average interest earning assets
(on a tax equivalent basis) and average interest bearing liabilities, the
average yields earned on such assets and rates paid on such liabilities, and the
net interest margin, all for the periods indicated.
32

<PAGE>
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED
SEPTEMBER 30, 1994 1993 1992
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS (1):
Securities:
Taxable................................ $19,400 $ 701 4.82% $15,236 $ 779 5.11% $10,095 $ 659
Tax-exempt (2)......................... 504 15 3.97 334 13 3.89 0 0
Total securities..................... 19,904 716 4.80 15,570 792 5.09 10,095 659
Loans (net of unearned income):
Taxable................................ 30,368 1,988 8.73 29,087 2,676 9.20 27,861 2,615
Tax-exempt............................. 0 0 0 715 47 6.57 1,414 95
Total loans.......................... 30,368 1,988 8.73 29,802 2,723 9.14 29,275 2,710
Federal funds sold....................... 2,993 87 3.88 2,692 79 2.93 2,793 92
Interest-bearing deposits in other
banks.................................. 208 1 0.64 192 2 1.04 125 1
Total earning assets................... 53,473 $2,792 6.96% 48,256 $3,596 7.45% 42,288 $3,462
Less: allowance for credit losses........ (355 ) (334) (323)
Total nonearning assets.................. 2,624 2,298 2,426
Total assets............................. $55,742 $50,220 $44,391
LIABILITIES (1):
Interest-bearing deposits:
Checking............................... $12,312 $ 214 2.32% $11,293 $ 264 2.34% $10,042 $ 327
Regular savings........................ 19,029 497 3.48 15,704 583 3.71 10,185 442
Money market savings................... 2,844 53 2.48 3,210 79 2.46 2,935 99
Time deposits:
$100,000 and over.................... 1,571 37 3.14 1,655 52 3.14 2,380 113
Under $100,000....................... 7,000 221 4.21 6,685 283 4.23 8,370 425
Total interest-bearing deposits...... 42,756 1,022 3.19 38,547 1,261 3.27 33,912 1,406
Total interest-bearing liabilities... 42,756 1,022 3.19% 38,547 1,261 3.27% 33,912 1,406
Non-interest bearing liabilities:
Demand deposits...................... 5,373 4,388 3,727
Other liabilities.................... 338 289 195
Total liabilities........................ 48,467 43,224 37,834
Shareholders' equity..................... 7,275 6,996 6,557
Total liabilities and shareholders'
equity................................. $55,742 $50,220 $44,391
Net interest income...................... $1,770 $2,335 $2,056
Interest rate spread..................... 3.77% 4.18%
Interest expense as a percent of average
earning assets......................... 2.55 2.61
Net interest margin...................... 4.41 4.82
<CAPTION>

YIELD/
RATE
<S> <C>

ASSETS (1):
Securities:
Taxable................................ 6.53%
Tax-exempt (2)......................... 0
Total securities..................... 6.53
Loans (net of unearned income):
Taxable................................ 9.39
Tax-exempt............................. 6.72
Total loans.......................... 9.26
Federal funds sold....................... 3.29
Interest-bearing deposits in other
banks.................................. 0.8
Total earning assets................... 8.19%
Less: allowance for credit losses........
Total nonearning assets..................
Total assets.............................
LIABILITIES (1):
Interest-bearing deposits:
Checking............................... 3.26%
Regular savings........................ 4.34
Money market savings................... 3.37
Time deposits:
$100,000 and over.................... 4.75
Under $100,000....................... 5.08
Total interest-bearing deposits...... 4.15
Total interest-bearing liabilities... 4.15%
Non-interest bearing liabilities:
Demand deposits......................
Other liabilities....................
Total liabilities........................
Shareholders' equity.....................
Total liabilities and shareholders'
equity.................................
Net interest income......................
Interest rate spread..................... 4.04%
Interest expense as a percent of average
earning assets......................... 3.32
Net interest margin...................... 4.83
</TABLE>

(1) Average balances are derived from month-end balances.
(2) Income and yields are reported on a tax-equivalent basis assuming a federal
tax rate of 34%.
Net interest income is affected by changes in both average interest rates
and average volumes of interest-earning assets and interest-bearing liabilities.
The following table 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. 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.
33

<PAGE>
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1994 VS. 1993 1993 VS. 1992 1992 VS. 1991
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN: DUE TO CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Securities:
Taxable..................................... $178 $(44) $ 134 $ 209 $ (89) $ 120 $(28) $ 82) $(110)
Tax-exempt.................................. 7 0 7 13 0 13 -- -- --
Loans:
Taxable..................................... 52 (47) 5 111 (50) 61 318 (197) 121
Tax-exempt.................................. (24) (23) (47) (46 ) (2) (48) 95 0 95
Federal funds sold............................ 7 21 28 (3 ) (10) (13) 12 (6) 6
Interest bearing deposits in other banks...... 0 (1) (1) 1 0 1 1 0 1
Total earning assets.................... $220 $(94) $ 126 $ 285 $(151) $ 134 $398 $(285) $ 113
INTEREST-BEARING LIABILITIES:
Interest checking............................. $ 22 $ (1) $ 21 $ 50 $(113) $ (63) $ 83 $(195) $(112)
Regular savings deposits...................... 100 (32) 68 192 (51) 141 207 (48) 159
Money market deposits......................... (9) 2 (7) 11 (31) (20) 68 (85) (17)
Time deposits................................. 8 0 8 (108 ) (95) (203) (85) (209) (294)
Total interest-bearing liabilities..... 121 (31) 90 145 (290) (145) 273 (537) (264)
Change in net interest income.......... $ 99 $(63) $ 36 $ 140 $ 139 $ 279 $125 $ 252 $ 377
</TABLE>

INTEREST SENSITIVITY
An important element of both earnings performance and the maintenance of
sufficient liquidity is management of the interest sensitivity gap. The interest
sensitivity gap is the difference between interest sensitive assets and interest
sensitive liabilities in a specific time interval. The gap can be managed by
repricing assets or liabilities, by replacing an asset or liability at maturity
or by adjusting the interest rate during the life of an asset or liability.
Matching the amounts of assets and liabilities repricing in the same time
interval helps to hedge the risk and minimize the impact on net interest income
in periods of rising or falling interest rates.
Potomac evaluates interest sensitivity risk and then formulates strategies
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
strategies are based on management's outlook regarding future interest rate
movements, the state of the regional and national economies and other financial
and business risk factors.
Potomac establishes prices for deposits and loans based on local market
conditions and manages its securities portfolio in accordance with policies set
by Potomac. Potomac reviews its interest sensitivity position at least monthly.
At December 31, 1993, Potomac had $13.4 million less in assets than
liabilities subject to repricing within one year and was, therefore, in a
liability-sensitive position. A liability-sensitive institution's net interest
margin and net interest income generally will be impacted favorably by declining
interest rates, while that of an asset-sensitive institution generally will be
impacted favorably by rising interest rates.
The following tables present the maturity of Potomac's loan portfolio by
category and the fixed and variable portions of each category and its interest
sensitivity position as of September 30, 1994. These are one-day positions which
are continually changing and are not necessarily indicative of Potomac's
position at any other time.
MATURITY SCHEDULE OF PERIOD END LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994(1)
AFTER
5
1 YEAR OR LESS 1 TO 5 YEARS YEARS
FIXED VARIABLE FIXED VARIABLE FIXED
RATE RATE RATE RATE RATE
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Commercial......................................................... $ 46 $ 6,451 $ -- $ -- $ --
<CAPTION>

VARIABLE
RATE
<S> <C>

Commercial......................................................... $ --
</TABLE>
34

<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Real estate construction........................................... -- 542 -- -- --
Real estate mortgage............................................... 532 7,335 9,831 1,698 3,211
Consumer installment............................................... 449 -- 701 -- --
$1,027 $ 14,328 $10,532 $1,698 $3,211
<CAPTION>
Real estate construction........................................... --
Real estate mortgage............................................... --
Consumer installment............................................... --
--
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993(2)
AFTER
5
1 YEAR OR LESS 1 TO 5 YEARS YEARS
FIXED VARIABLE FIXED VARIABLE FIXED
RATE RATE RATE RATE RATE
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Commercial......................................................... $ 131 $ 5,865 $ -- $ -- $ --
Real estate construction........................................... -- 868 -- -- --
Real estate mortgage............................................... 1,366 7,919 8,292 1,491 3,437
Consumer installment............................................... 467 -- 586 -- --
$1,964 $ 14,652 $ 8,878 $1,491 $3,437

<CAPTION>
VARIABLE
RATE
<S> <C>
Commercial......................................................... $ --
Real estate construction........................................... --
Real estate mortgage............................................... --
Consumer installment............................................... --
--
</TABLE>

(1) Does not include nonaccrual loans of $5,000, allowance for loan losses of
$360,000, or unearned income of $68,000.
(2) Does not include nonaccrual loans of $20,000, allowance for loan losses of
$357,000, or unearned income of $101,000.

Interest Sensitivity Analysis
<TABLE>
<CAPTION>
September 30, 1994
Within 36-365 1 to 5 Over
90 days days Years 5 Years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans (net of unearned income)(1) $13,480 $1,875 $12,162 $3,211 $30,728
Securities(2) 998 3,988 13,177 1,166 19,329
Federal Funds sold and other
short term investments 2,250 0 0 0 2,250
Total earnings assets 16,728 5,863 25,339 4,377 52,307

Interest-Bearing Liabilities:(3)
Interest checking 12,002 0 0 0 12,002
Regular savings 0 16,873 1,690 0 18,563
Money market savings 2,978 0 0 0 2,978
Certificates of deposit
$100,000 and over 691 741 205 0 1,637
Under $100,000 2,183 3,048 1,390 0 6,621
Short-term borrowings 0 0 0 0 0
Total interest-bearing liabilities 17,854 20,662 3,285 0 41,801

Period gap (1,126) (14,799) 22,054 4,377 $10,506

Cumulative gap ($1,126) ($15,925) $ 6,129 $10,506

Ratio of cumulative gap to
total earnings assets (2.2%) (30.4%) 11.7% 20.1%
</TABLE>

(1) Does not include non accrual loans of $5,000 or allowance for loan losses
of $360,000.
(2) Does not include Federal Reserve Stock of $195,000.
(3) Does not include non-interest bearing demand deposits of $5,637,000.

NONINTEREST INCOME
Noninterest income for 1993 increased by $16,769, or 9.5%, over the same
period in 1992. Service charges on deposit accounts, the largest single item of
noninterest income, were $140,562 for 1993, up 11.8% over the prior year.
Noninterest income in 1992 increased 5% over 1991. Service charges on
deposit accounts in 1992 increased by $32,593 to $125,710, primarily due to an
increase in the number of accounts.
NONINTEREST EXPENSE
After an increase in noninterest expense of $233,320 in 1992, noninterest
expenses increased only $30,356 to $1.8 million in 1993. The $263,676 increase
over this two year period was primarily due to a $159,463, or 23.57% increase in
salaries and benefits because of personnel additions and promotions, and normal
salary increases, and a 56.0% increase from $57,747 in 1991 to $90,110 in 1993
in deposit insurance premiums.
INCOME TAXES
Reported income tax expense at December 31, 1993 was $214,502, up from
$59,124 for 1992, with the increase attributable to increased earnings. Reported
income tax expense in 1992 was due to substantially higher taxable income for
the year over that reported in 1991. Note 7 to the Financial Statements provides
a reconciliation between the amount of income tax expense computed using the
federal statutory income tax rate and Potomac's actual income tax expense. Also
included in Note 7 to the Financial Statements is information regarding the
principal items giving rise to deferred taxes for the three years ended December
31, 1993.
LOAN PORTFOLIO
Loans, net of unearned income, were $30.3 million at December 31, 1993, up
4.9% from the $28.9 million at December 31, 1992. While loan demand was
relatively weak during 1992 and 1993, Potomac's loan portfolio increased $7.7
million, or 37.9% in 1991. Slow loan demand resulted from the sluggish economy
and the weakened real estate market.
Loans secured by real estate consist of a portfolio of predominately
non-farm, non-residential loans, which consists of commercial and industrial
loans where real estate is a source of collateral. Such loans at December 31,
1993 were 38.9% of the loan portfolio. Residential loans comprised 27.5% of the
loan portfolio at December 31, 1993, home equity lines 6.8% and there were no
multifamily or agricultural loans outstanding at the 1993 year end. Potomac has
historically not engaged in mortgage lending on multifamily properties. Real
estate construction loans accounted for only 2.9% of total loans outstanding at
December 31, 1993. Potomac's charge-off rate for all loans did not include any
real estate loans in 1993 or 1992. Potomac's consumer loan portfolio, its second
largest loan category, consists principally of installment loans.
35

<PAGE>
Consistent with its focus on providing community-based financial services,
Potomac generally does not make loans outside its principal market regions.
Potomac maintains a policy not to originate or purchase loans classified by
regulators as highly leveraged transactions or loans to foreign entities or
individuals.
Potomac's unfunded loan commitments (excluding unused home equity lines of
credit) amounted to $5.0 million at December 31, 1993, compared to $3.3 million
at December 31, 1992. This increase is attributable to increased customer
demands and increased credit commitments.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Commercial.................................................. $ 6,497 $ 5,996 $ 7,395 $ 8,322 $ 7,452 $ 5,969
Real estate construction.................................... 542 868 572 219 0 0
Real estate mortgage:
Residential (1-4 family).................................. 9,505 8,634 5,472 3,809 2,062 1,153
Home equity lines......................................... 2,115 2,057 2,899 2,671 2,488 1,917
Multifamily............................................... 0 0 0 0 0 0
Non-farm, non-residential (1)............................. 10,987 11,814 11,498 11,530 6,893 3,520
Agricultural.............................................. 0 0 0 0 0 0
Real estate mortgage subtotal............................. $22,607 $22,505 $19,869 $18,010 $11,443 $ 6,590
Consumer installment........................................ 1,155 1,073 1,179 1,605 1,457 1,822
Total loans............................................... 30,801 30,442 29,015 28,156 20,352 14,381
Less unearned income........................................ 68 101 109 107 24 28
Loans-net of unearned income (2)............................ $30,733 $30,341 $28,906 $28,049 $20,328 $14,353
</TABLE>

(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
(2) Does not include the allowance for loan losses.
ASSET QUALITY
The allowance for credit losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio of Potomac. The level of
credit losses is affected by general economic trends as well as conditions
affecting individual borrowers. 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.
The provision for credit losses in 1993 decreased to $50,287, as compared
to $212,603 in 1992, in response to slow loan growth in Potomac's markets and
improved collection efforts. The provision for credit losses in 1991 was
$308,167, primarily in response to the deterioration in the local economy and
real estate markets. The ratio of the allowance for credit losses to total
loans, net of unearned income remained fairly constant over this three year
period due to small increases in the allowance in comparison to total loans.
Potomac's net charge-offs in 1993 were lower by approximately $164,000 than
1992 and $225,000 than 1991. The improved charge-off experience was due
primarily to improved economy and better loan policies. Net charge-offs to
average loans was 0.04% for the year 1993, compared with 0.61% for 1992. The
ratio of net charge-offs to average loans was 0.98% for 1991.
The allowance for credit losses was $356,718 at December 31, 1993, up
$38,484 over the $318,234 at December 31, 1992. The allowance was $281,436 at
December 31, 1991.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period..................................... $ 357 $ 318 $ 318 $ 281 $ 210 $ 136 $ 13
Loans charged off:
Commercial.................................................. 20 12 12 176 185 -- --
Real estate construction.................................... -- -- -- -- -- -- --
Real estate mortgage........................................ 54
Consumer installment........................................ 3 -- -- -- -- 5 --
Total loans charged-off................................... 23 12 12 176 239 5 0
Recoveries:
Commercial.................................................. 78 -- -- -- -- -- --
Real Estate Construction.................................... -- -- -- -- -- -- --
Real estate mortgage........................................
Consumer installment........................................ -- -- -- -- 2 -- --
Total recoveries.......................................... 78 -- -- -- 2 -- --
Net charge-offs.................................................. (55) 12 12 176 237 5 --
Provision for credit losses...................................... (52) 39 51 213 308 79 123
Balance, end of period........................................... $ 360 $ 345 $ 357 $ 318 $ 281 $ 210 $ 136
Ratio of allowance for credit losses to loans outstanding at end
of period...................................................... 1.17% 1.15% 1.18% 1.10% 1.00% 1.03% 0.95%
Ratio of net charge-offs to average loans outstanding during
period......................................................... (0.17) 0.04 0.04 0.61 0.98 0.03 0.00
</TABLE>

(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
The ratio of allowance for credit losses to nonperforming assets totaled
1785% at December 31, 1993; 159% at December 31, 1992 and 160%, at December 31,
1991. Management evaluates nonperforming loans relative to their collateral
value and makes appropriate reductions in the carrying value of those loans
based on that review. Management believes, based on its review, that Potomac has
adequate reserves to cover any future write-down that may be required on these
loans.
The following table shows the balance and percentage of Potomac's allowance
for credit losses allocated to each major category of loans:
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
REAL ESTATE REAL ESTATE
COMMERCIAL CONSTRUCTION MORTGAGE CONSUMER
RESERVE PERCENTAGE RESERVE PERCENTAGE RESERVE PERCENTAGE RESERVE
FOR CREDIT OF TOTAL FOR CREDIT OF TOTAL FOR CREDIT OF TOTAL FOR CREDIT
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
September 30,
1994........................ $ 81 21.10% -- 1.80% $268 73.40% $ 11
1993........................ 86 22.90 -- 5.20 248 68.50 11
December 31,
1994........................ $ 75 19.70% -- 2.90% $271 73.90% $ 11
1993........................ 92 25.50 -- 1.90 214 68.50 12
1992........................ 96 27.60 -- 0.80 169 63.90 16
<CAPTION>

PERCENTAGE
OF TOTAL
LOANS
<S> <C>

September 30,
1994........................ 3.70%
1993........................ 3.40

December 31,
1993........................ 3.50%
1992........................ 4.10
1991........................ 5.70
</TABLE>

Potomac has allocated the allowance according to the amount deemed to be
reasonably necessary to provide for the possibility of losses being incurred
within each of the above categories of loans. The allocation of the allowance as
shown in the table above should not be interpreted as an indication that loan
losses in future years will occur in the same proportions or that the allocation
indicates future loan loss trends. Furthermore, the portion allocated to each
loan category is not the total amount available for future losses that might
occur within such categories since the total allowance is a general allowance
applicable to the entire portfolio.
37

<PAGE>
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
At the end of 1993, the allowance for credit losses was 1.2% of average
loans compared to 1.1% in 1992 and 1.2% of average loans in 1991. The amount
expensed over the last five years as an addition to the reserve has been
$774,000. Losses over the same period have been $432,000. The loss in 1992 was
due to one single loan of $176,290 and 1991 losses were composed mainly of one
loan for $185,000.
It is the opinion of Potomac's management that the reserve is adequate to
absorb any losses that may occur.
NONPERFORMING ASSETS
Total nonperforming assets, which consist of nonaccrual loans, restructured
loans and foreclosed property, were $20,320 at December 31, 1993, a decrease of
$179,680 from December 31, 1992. Nonperforming assets at December 31, 1992
increased $25,000 over year end 1991.
The decrease in nonperforming assets in 1993 from both 1992 and 1991 was
attributable to two commercial loans that were written off in those years. Both
were commercial loans secured by real estate with a combined total of
approximately $275,000. At September 30, 1994, Potomac's nonperforming assets
totalled $5,169.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Nonaccrual loans............................. $ 5 $ 220 $ 20 $ 200 $ 175 $ 349 --
Restructured loans........................... -- -- -- -- -- -- --
Foreclosed property.......................... -- -- -- -- -- -- --
Total nonperforming assets................. $ 5 $ 220 $ 20 $ 200 $ 175 $ 349 --
Allowance for credit losses
to period end loans........................ 1.17% 1.15% 1.18% 1.10% 1.00% 1.03% 0.95%
Allowance for credit losses to nonaccrual
loans...................................... 7,200 157 1,785 159 161 60 --
Nonperforming assets to period end loans..... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net charge-offs to average loans............. (0.17) 0.04 0.04 0.62 0.98 0.03 0.00
</TABLE>

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. 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 credit losses charged against
earnings.
At December 31, 1993, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $249,487, compared to $240,078 at December 31, 1992 and $310,302 at
December 31, 1991.
During 1993, $403 in additional interest income would have been recorded if
Potomac's nonaccrual loans had been current in accordance with their original
terms. During 1992, $13,000 in additional interest income would have been
recorded if Potomac's nonaccrual loans had been current in accordance with their
original terms.
At December 31, 1993, potential problem loans were approximately $575,206.
These loans are subject to regular periodic management attention, and their
status is reviewed on a regular basis. The potential problem loans identified at
December 31, 1993 are generally secured by residential and commercial real
estate with appraised values that exceed the principal balance.
SECURITIES
The book value of the securities portfolio was $19.5 million at December
31, 1993, compared to $13.4 million at December 31, 1992. The securities
portfolio increased from $9.2 million in 1991, largely in response to favorable
investment yields and weak loan demand. Investment in U.S. Government securities
increased $5.5 million, or 41.6%, for the year 1993, and increased $4.2 million
or 47.0% for the year 1992.
38

<PAGE>
The securities portfolio consists solely of investment securities.
Securities are classified as investment securities when management has the
intent and Potomac has the ability at the time of purchase to hold the
securities to maturity. Investment securities are carried at cost adjusted for
amortization of premiums and accretion of discounts.
39

<PAGE>
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BOOK VALUE:
U.S. Government securities:
Held to maturity........................... $14,976 $18,757 $13,245 $9,010
Available for sale......................... 3,849 -- -- --
States and political subdivisions:
Held to maturity........................... 504 505 -- --
Available for sale......................... -- -- -- --
Other securities............................. 195 195 195 195
Total securities............................. $19,524 $19,457 $13,440 $9,205
</TABLE>

MATURITY ANALYSIS AS OF SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
ONE ONE
YEAR TO FIVE OVER
OR FIVE TO TEN TEN
LESS YEARS YEARS YEARS TOTAL
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. AGENCY SECURITIES:
Book Value................................. $ -- $5,960 $ 500 $ -- $ 6,460
Market Value............................... -- 5,804 469 -- 6,273
Weighted average yield..................... -- 5.45% 5.60% -- 5.47%
U.S. TREASURY SECURITIES:
Book Value................................. 4,986 6,883 496 -- 12,365
Market Value............................... 4,955 6,770 465 -- 12,190
Weighted average yield..................... 4.51% 5.12% 6.45% -- 4.94%
STATE AND POLITICAL SUBDIVISIONS:
Book Value................................. -- 303 201 -- 504
Market Value............................... -- 289 188 -- 477
Weighted average yield..................... -- 5.87% 6.21% -- 5.98%
OTHER SECURITIES:
Book Value................................. -- -- -- 195 195
Market Value............................... -- -- -- 195 195
Weighted average yield..................... -- -- -- 6.00% 6.00%
TOTAL SECURITIES:
Book Value................................. 4,986 13,146 1,197 195 19,524
Market Value............................... 4,955 12,863 1,122 195 19,135
Weighted average yield..................... 4.51% 5.32% 6.10% 6.00% 5.22%
</TABLE>

(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 2 to the Financial Statements as of December 31, 1993 for an
analysis of gross unrealized gains and losses in the securities portfolio.
DEPOSITS
Potomac has made an effort in recent years to increase core deposits and
reduce cost of funds. Deposits provide funding for Potomac'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, 1993 were $45.3 million, a 13.2% increase from the
same period in 1992. Interest checking, money market and regular savings all
increased over 1992 levels. Certificates of deposits of $100,000 and over
decreased from $2.8 million in 1991 to $1.7 million in 1992 and 1993. Deposits
for 1992 grew $5.3 million, or 15.3% to $40 million.
44

<PAGE>
The deposit growth resulted from increases in interest checking, money market
and regular savings. Noninterest-bearing checking deposits were 10.4% of total
deposits at December 31, 1993, compared to 9.7% for the same period one year
earlier.
As shown below, average total deposits grew by 14.1% in 1993 and 21.31% in
1992. The average aggregate interest rate paid on interest-bearing deposits was
3.3% in 1993, compared to 4.14% for 1992 and 5.80% for 1991. The largest amount
of Potomac's deposits are higher yielding time deposits because most of its
customers are individuals who seek higher yields than those offered on savings
and demand accounts.
The following tables are a summary of average deposits and average rates
paid:
DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30,
1994 1993 1992 1991
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Noninterest-bearing accounts................. $ 5,373 $ 4,390 $ 3,727 $ 2,720
Interest-bearing accounts:
Interest-checking.......................... 12,312 2.32% 11,292 2.34% 10,041 3.25% 9,030 4.86%
2,844 2.49 3,210 2.45 2,935 3.37 2,336 4.98
19,028 3.49 15,703 3.71 10,185 4.34 4,851 5.83
Time deposits:
Less than $100,000...................... 7,000 4.21 6,685 4.23 8,370 5.08 9,389 6.91
$100,000 and over....................... 1,571 3.14 1,655 3.17 2,380 4.75 2,694 6.79
Total interest-bearing accounts.............. 42,755 3.19 38,545 3.27 33,911 4.14 28,300 5.90
Total................................... $48,128 $42,935 $37,638 $31,020
</TABLE>

MATURITIES OF CD'S OF $100,000 AND OVER
<TABLE>
<CAPTION>
WITHIN THREE TO SIX TO OVER PERCENT
THREE SIX TWELVE ONE OF TOTAL
MONTHS MONTHS MONTHS YEAR TOTAL DEPOSITS
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
At September 30, 1994........................ $691 $336 $405 $205 $1,637 3.45%
At December 31, 1993......................... 551 732 223 202 1,708 3.77
</TABLE>

CAPITAL RESOURCES
The adequacy of Potomac's capital is reviewed by management on an ongoing
basis with reference to the size, composition, and quality of Potomac's asset
and liability levels and consistent with regulatory requirements and industry
standards. 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 Federal Financial Institutions Examination Council has adopted capital
guidelines to supplement the existing 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%, of which at least 4% must be Tier 1 capital, composed of common
equity, retained earnings and a limited amount of perpetual preferred stock,
less certain goodwill items. Potomac had a ratio of risk-weighted assets to
total capital of 25.61% at December 31, 1993 and a ratio of risk-weighted assets
to Tier 1 capital of 24.41%. Both of these exceed the capital requirements
adopted by the federal regulatory agencies.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
</TABLE>
45

<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Tier 1 Capital:
Common stock............................... $ 3,250 $ 3,250 $ 3,250 $ 3,250
Additional paid in capital................. 3,250 3,250 3,250 3,250
Retained earnings.......................... 1,029 728 291 33
Total Tier 1 capital....................... 7,529 7,228 6,791 6,533
Tier 2 Capital:
Allowance for credit losses................ 360 357 318 281
Allowable long term debt................... -- -- -- --
Total Tier 2 capital....................... 360 357 318 281
Total risk-based capital................... $ 7,889 $ 7,585 $ 7,109 $ 6,814
Risk-weighted assets....................... $32,749 $29,614 $30,047 $29,950
Capital Ratios:
Tier 1 risk-based capital ratio............ 22.99% 24.41% 22.60% 21.81%
Total risk-based capital ratio............. 24.09 25.61 23.66 22.75
Tier 1 capital to average total assets..... 13.51 13.56 14.34 15.95
</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,
investments in Treasury securities, and loans maturing within one year. As a
result of Potomac's management of liquid assets and the ability to generate
liquidity through liability funding, management believes that Potomac maintains
overall liquidity sufficient to satisfy its depositors' requirement and meet its
customers' credit needs.
At December 31, 1993, cash, interest-bearing deposits with banks, federal
funds sold, investments in Treasury securities, and loans maturing within one
year were 48.05% of total earning assets. As of December 31, 1993, approximately
48.29% or $14.7 million of the loan portfolio would mature or reprice within a
one-year period. Potomac had no long-term debt or short-term borrowings at
September 30, 1994 or at the end of any of the past three years.
FIRST NINE MONTHS RESULTS OF OPERATIONS
OVERVIEW. Net income for the first nine months of 1994 totalled $351,334
which was comparable to the $348,772 earned in the first nine months of 1993.
While net interest income increased $126,534, or 4.7%, to $2.8 million, net
interest expense increased from $932,526 to $1.0 million. Noninterest income
decreased by 6.4% from $148,949 for the first nine months of 1993 to $139,460
for the first nine months of 1994, primarily due to a decline in service
charges. Noninterest expense increased by $100,706 to $1.4 million, primarily
due to an increase of 10% in salary expense, which in turn resulted from normal
employee compensation increases and the addition of new employees and to an
increase in deposit insurance premiums. Earnings were increased by a reduction
of $90,602 in the provision for credit losses, from $38,630 in the first nine
months of 1993 to $(51,792) for the comparable 1994 period.
Loan demand remained basically flat for the first nine months of 1994 with
loans, net of unearned discount, increasing only slightly from $30.3 at December
31, 1993 to $30.7 million at September 30, 1994. Investment securities held,
primarily United States Treasury and United States Agency securities, remained
stable at $19.5 million at September 30, 1994 compared to $19.4 million at
December 31, 1993. Total assets were $55.2 million, up $2.4 million from the
$52.8 million reported on December 31, 1993. Total deposits were up $2.1 million
at $47.4 million at September 30, 1994 compared to $45.3 million at December 31,
1993.
ASSET QUALITY. Loan quality continues to be good despite slow economic
growth in the general economy. For the first nine months, Potomac had loan
chargeoffs of approximately $23,000 and loan recoveries of $78,000 which
accounted for the net decrease in the allowance.
At September 30, 1994, total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, totalled $5,169
or .01% of total loans net of unearned discount. This represents an improvement
of $15,151 over total nonperforming assets of $20,320 reported by Potomac on
December 31, 1993. Loans 90 days or more past due and still accruing interest
totalled $597,829, an increase of $348,342 from the $249,487 of such loans
reported at December 31, 1993.
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In management's judgment, the balance in the reserve for credit losses is
adequate to cover future losses in the existing loan portfolio.
Potential problem loans as of September 30, 1994 totalled $584,161. These
are loans in which Potomac feels the borrower's ability to comply with current
repayment terms may be questionable. These loans are subject to regular periodic
management attention, and their status is reviewed on a regular basis. The
potential problem loans identified at September 30, 1994 are generally secured
by residential and commercial real estate with appraised values that exceed the
principal balance.
ACCOUNTING RULE CHANGES
In December 1991, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FSAS") No. 106, "Employer's Accounting for
Postretirement Benefits Other than Pensions." The statement, effective for years
beginning after December 15, 1994, requires that the obligation to provide
Postretirement benefits (principally health care benefits) be recognized over
the employee's service periods rather than on a pay-as-you-go basis. Potomac
does not provide postretirement benefits, and therefore the statement will have
no material impact on Potomac's future earnings.
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards Numbers 107, 114 and 118 which are effective for years
beginning in 1995. The requirements and financial statement impact of these
standards are discussed in the Notes to the Financial Statements for the years
ended December 31, 1993 and 1992 which are incorporated herein by reference.
BUSINESS OF F&M
HISTORY AND BUSINESS
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 thirteen banks, which expanded its market area
and increased market share in Virginia and West Virginia. F&M has eleven
subsidiary banks (the "Subsidiary Banks") that operate 73 banking offices
offering a full range of banking services principally to individuals and small
and middle-market businesses in the Shenandoah Valley, central and northern
Virginia, southside Virginia, and the eastern panhandle of West Virginia.
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-Blakeley and F&M
Bank-Keyser operate trust departments offering a range of fiduciary services.
F&M also operates Big Apple Mortgage which engages in residential mortgage
origination and servicing in the Shenandoah Valley and the eastern panhandle of
West Virginia.
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, among other things, lending
practices, credit analysis and approval procedures, as well as guidelines for
deposit pricing and investment portfolio management. In addition, F&M has
established a centralized loan review team that regularly performs a detailed,
on-site review and analysis of each Subsidiary Bank's loan portfolio to ensure
the consistent application of credit policies and procedures system-wide. A
senior holding company officer serves on the board of directors of each
Subsidiary Bank to monitor operations and to serve as a liaison to F&M.
F&M operates in six market regions: the Shenandoah Valley and Loudoun
County; 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
area that includes the eastern portions of Fairfax and Prince William Counties,
Loudoun County and the Warrenton and surrounding Fauquier County area. F&M
operates 36 banking offices in the Shenandoah Valley from Winchester to
Harrisonburg and in Loudoun County with deposits of $791.0 million at September
30, 1994, ten banking offices in the eastern panhandle of West Virginia with
deposits of $236.4 million at September 30, 1994, seven banking offices in the
Charlottesville/Albemarle County and surrounding area with deposits of $59.8
million at September 30, 1994, three banking offices in Emporia, Virginia and
surrounding Greenville County with deposits of $58.9 million at September 30,
1994, nine banking offices in suburban Richmond with deposits of $121.5 million
at September 30, 1994, five banking offices in the Fairfax and Prince William
County area of northern Virginia area with deposits of $94.3 million at
September 30, 1994 and three offices in the Warrention and surrounding Fauquier
County area
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with deposits of $84.6 million at September 30, 1994. F&M's total deposits were
$1.443 billion at September 30, 1994. F&M's principal banking market is
Winchester and the surrounding five Virginia counties where its lead bank, F&M
Bank-Winchester, is the dominant financial institution in terms of deposit
market share.
At September 30, 1994, F&M had total consolidated assets of approximately
$1.7 billion, total consolidated deposits through its banking subsidiaries of
approximately $1.4 million and consolidated shareholders' equity of
approximately $161.7 million. F&M's total consolidated net income for the nine
months ended September 30, 1994, was approximately $14.9 million, or $0.97 per
share.
F&M'S ACQUISITION PROGRAM
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since the beginning of 1988,
F&M has acquired approximately $745.7 million in assets and approximately $592.2
million in deposits through nine 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 new 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 and may, after
the date of this Proxy Statement/Prospectus, enter into agreements to acquire
one or more financial institutions.
F&M recently entered into an agreement to acquire a closely-held
investment advisory firm, Farland Investment Management, Inc., based in
Winchester, Virginia. The transaction, which is subject to the receipt of the
required bank regulatory approvals, is expected to close before the end of
the first quarter of 1995 and involves the issuance of F&M Common Stock in a
tax-free share exchange with the sole shareholder of Farland Investment.
For additional information about F&M's business, see "Incorporation of
Certain Information by Reference."
COMPARATIVE RIGHTS OF SHAREHOLDERS
GENERAL
F&M and Potomac are corporations subject to the provisions of the Virginia
Stock Corporation Act (the "Virginia SCA"). Shareholders of Potomac, whose
rights are governed by Potomac's Articles of Incorporation and Bylaws and by the
Virginia SCA, will become shareholders of F&M upon consummation of the
Affiliation. The rights of such shareholders as shareholders of F&M will then be
governed by the Articles of Incorporation and Bylaws of F&M and by the Virginia
SCA.
The following is a summary of the material differences in the rights of
shareholders of Potomac and F&M. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE ARTICLES OF INCORPORATION AND BYLAWS OF EACH CORPORATION AND TO
THE VIRGINIA SCA.
AUTHORIZED CAPITAL
F&M. F&M is authorized to issue (1) 20,000,000 shares of Common Stock, par
value $2.00 per share, of which 15,648,652 shares were issued and outstanding as
of September 30, 1994, and (ii) 5,000,000 shares of serial Preferred Stock,
without par value, of which no shares were issued and outstanding as of
September 30, 1994. F&M's Articles of Incorporation authorize the F&M Board,
without shareholder approval, to fix the preferences, limitations and relative
rights of the preferred stock and to establish series of such preferred stock
and determine the variations between each series. If any shares of preferred
stock are issued, the rights of holders of F&M Common Stock would be subject to
the rights and preferences conferred to holders of such preferred stock. See
"Description of F&M Capital Stock" for additional information.
POTOMAC. Potomac's Articles of Incorporation authorize the issuance of up
to 700,000 shares of Potomac Common Stock, par value $10.00 per share, of which
325,000 shares were issued and outstanding as of September 30, 1994.
DIVIDEND RIGHTS
F&M. The holders of F&M Common Stock are entitled to share ratably in
dividends when and as declared by the F&M Board of Directors out of funds
legally available therefor. One of the principal sources of income to F&M is
dividends from its subsidiary banks. For a description of certain restrictions
on the payment of dividends by banks, see "Market Prices and Dividends." F&M's
Articles of Incorporation permit the F&M Board to issue preferred stock with
terms set by the F&M Board, which terms may include the right to receive
dividends ahead of the holders of F&M Common Stock. No shares of such preferred
stock are presently outstanding.
POTOMAC. The holders of Potomac Common Stock also are entitled to share
ratably in dividends when and as declared by the Potomac Board of Directors out
of funds legally available therefor. See "Market Prices and Dividends" for a
description of certain restrictions on the payment of dividends by banks.
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VOTING RIGHTS
The holders of both F&M and Potomac Common Stock have one vote for each
share held on any matter presented for consideration by the shareholders.
Neither the holders of F&M nor Potomac Common Stock are entitled to cumulative
voting in the election of directors.
DIRECTORS AND CLASSES OF DIRECTORS
F&M. All of F&M's directors are elected each year. F&M's Articles of
Incorporation do not included a provision relating to the removal of directors.
Accordingly, the removal of F&M directors is governed by the Virginia SCA which
provides that shareholders may remove directors with or without cause if, in the
case of F&M, the number of votes cast to remove him constitutes a majority of
the outstanding shares of F&M Common Stock.
POTOMAC. The Potomac Board is divided into three classes so that each
director serves for a term ending on the date of the third annual meeting
following the annual meeting at which such director was elected. In the event of
any increase in the authorized number of directors, the newly created
directorships resulting from such increase would be apportioned among the three
classes of directors so as to maintain such classes as nearly equal as possible.
Because of the classification of directors, unless the shareholders act to
remove directors from office, two annual meetings generally would be required to
elect a majority of the Potomac Board. Under Potomac's Articles of
Incorporation, approval by the vote of more than 70% of the outstanding shares
of Potomac Common Stock entitled to vote is required for the removal of any
director.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Virginia SCA and the Articles of Incorporation
and Bylaws of F&M and Potomac may discourage an attempt to acquire control of
F&M or Potomac, respectively, that a majority of either corporation's
shareholders determined was in their best interests. These provisions also may
render the removal of one or all directors more difficult or deter or delay
corporate changes of control that the F&M Board or Potomac Board, respectively,
did not approve.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS. The provisions of
Potomac's Articles providing for classification of the Board of Directors into
three separate classes and removal of directors only with the affirmative vote
of the holders of more than 70% of the outstanding shares may have certain
anti-takeover effects.
AUTHORIZED PREFERRED STOCK. F&M's Articles of Incorporation authorize
5,000,000 shares of preferred stock. The F&M Board may, subject to applicable
law and the rules of the NYSE, authorize the issuance of preferred stock at such
times, for such purposes and for such consideration as it may deem advisable
without further shareholder approval. The issuance of preferred stock under
certain circumstances may have the effect of discouraging an attempt by a third
party to acquire control of F&M by, for example, authorizing the issuance of a
series of preferred stock with rights and preferences designed to impede the
proposed transaction.
SUPERMAJORITY VOTING PROVISIONS. The Virginia SCA provides that, unless a
corporation's articles of incorporation provide for a higher or lower vote,
certain significant corporate actions must be approved by the affirmative vote
of the holders of more than two-thirds of the votes entitled to be cast on the
matter. Corporate actions requiring a two-thirds vote include amendments to a
corporation's articles of incorporation, adoption of plans of merger or
exchange, sales of all or substantially all of a corporation's assets other than
in the ordinary course of business and adoption of plans of dissolution
("Fundamental Actions"). The Virginia SCA provides that a corporation's articles
may either increase the vote required to approve Fundamental Actions or may
decrease the required vote to not less than a majority of the votes entitled to
be cast.
F&M's Articles provide that a Fundamental Action shall be approved by a
vote of a majority of all votes entitled to be cast on such transactions by each
voting group entitled to vote on the transaction, provided that the transaction
has been approved and recommended by at least two-thirds of the directors in
office at the time of such approval and recommendation. If the transaction is
not so approved and recommended, then the transaction shall be approved by the
vote of 80% or more of all votes entitled to be cast on such transactions by
each voting group entitled to vote on the transaction.
The Articles of Incorporation of Potomac provide that a Fundamental Action
must be approved by more than 70% of the then total number of directors in
office and by more than 70% of the outstanding shares of Potomac Common Stock.
These provisions could tend to make the acquisition of either F&M or
Potomac more difficult to accomplish without the cooperation or favorable
recommendation of the F&M or Potomac Board, as the case may be.
SHAREHOLDER MEETINGS. Shareholders of both F&M and Potomac may not request
that a special meeting of shareholders be called.
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STATE ANTI-TAKEOVER STATUTES. Virginia has two anti-takeover statutes in
force, the Affiliated Transaction Statute and the Control Share Acquisitions
Statute.
AFFILIATED TRANSACTIONS. The Virginia SCA contains provisions governing
"affiliated transactions" (including, among other various transactions, mergers,
share exchanges, sales, leases, or other dispositions of material assets,
issuances of securities, dissolutions, and similar transactions) with an
"interested shareholder" (generally the beneficial owner of more than 10% of any
class of the corporation's outstanding voting shares). During the three years
following the date a shareholder becomes an interested shareholder, any
affiliated transaction with the interested shareholder must be approved by both
a majority of the "disinterested directors" (those directors who were directors
before the interested shareholder became an interested shareholder or who were
recommended for election by a majority of disinterested directors) and by the
affirmative vote of the holders of two-thirds of the corporation's voting shares
other than shares beneficially owned by the interested shareholder. The
foregoing requirements do not apply to affiliated transactions if, among other
things, a majority of the disinterested directors approve the interested
shareholder's acquisition of voting shares making such a person an interested
shareholder prior to such acquisition. Beginning three years after the
shareholder becomes an interested shareholder, the corporation may engage in an
affiliated transaction with the interested shareholder if (i) the transaction is
approved by the holders of two-thirds of the corporation's voting shares, other
than shares beneficially owned by the interested shareholder, (ii) the
affiliated transaction has been approved by a majority of the disinterested
directors, or (iii) subject to certain additional requirements, in the
affiliated transaction the holders of each class or series of voting shares will
receive consideration meeting specified fair price and other requirements
designed to ensure that all shareholders receive fair and equivalent
consideration, regardless of when they tendered their shares.
CONTROL SHARE ACQUISITIONS. Under the Virginia SCA's control share
acquisitions law, voting rights of shares of stock of a Virginia corporation
acquired by an acquiring person at ownership levels of 20%, 33 1/3%, and 50% of
the outstanding shares may, under certain circumstances, be denied unless
conferred by a special shareholder vote of a majority of the outstanding shares
entitled to vote for directors, other than shares held by the acquiring person
and officers and directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's articles of incorporation or by-laws permit the
acquisition of such shares prior to the acquiring person's acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws, the
statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than fifty
percent of the corporation's outstanding stock, objecting shareholders may have
the right to have their shares repurchased by the corporation for "fair value".
The provisions of the Affiliated Transactions Statute and the Control Share
Acquisition Statute are only applicable to public corporations that have more
than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but
neither F&M nor Potomac have done so. Therefore, the provisions of the
Affiliated Transactions Statute and the Control Share Acquisition Statute apply
in the same manner to F&M and Potomac.
DIRECTOR AND OFFICER EXCULPATION
The Virginia SCA provides that in any proceeding brought by or in the right
of a corporation or brought by or on behalf of shareholders of the corporation,
the damages assessed against an officer or director arising out of a single
transaction, occurrence or course of conduct may not exceed the lesser of (i)
the monetary amount, including the elimination of liability, specified in the
articles of incorporation or, if approved by the shareholders, in the bylaws as
a limitation on or elimination of the liability of the officer or director, or
(ii) the greater of (a) $100,000 or (b) the amount of cash compensation received
by the officer or director from the corporation during the twelve months
immediately preceding the act or omission for which liability was imposed. The
liability of an officer or director is not limited under the Virginia SCA or a
corporation's articles of incorporation and bylaws if the officer or director
engaged in willful misconduct or a knowing violation of the criminal law or of
any federal or state securities law.
F&M. The Articles of Incorporation of F&M provide that to the full extent
that the Virginia SCA permits the limitation or elimination of the liability of
directors or officers, a director or officer of F&M shall not be liable to F&M
or its shareholders for monetary damages in excess of one dollar ($1.00).
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POTOMAC. Potomac's Articles of Incorporation provide that in any proceeding
brought by or in the right of a corporation or brought by or on behalf of
shareholders of the corporation, the damages assessed against an officer or
director arising out of a single transaction, occurrence or course of conduct
shall not exceed $50,000.
INDEMNIFICATION
F&M. The Articles of Incorporation of F&M provide that to the full extent
permitted by the Virginia SCA and any other applicable law, F&M is required to
indemnify a director or officer of F&M who is or was a party to any proceeding
by reason of the fact that he is or was such a director or officer or is or was
serving at the request of the corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. The board of directors is empowered,
by majority vote of a quorum of disinterested directors, to contract in advance
to indemnify any director or officer.
POTOMAC. Potomac's Articles of Incorporation provide that each present or
former director and officer of the corporation shall be indemnified by the
corporation to the full extent permitted and in the manner prescribed by the
Virginia SCA. The Articles also require Potomac to reimburse reasonable expenses
as they are incurred in advance of final determination or other disposition of a
proceeding.
DISSENTERS' RIGHTS
The provisions of Article 15 of the Virginia SCA provide shareholders of a
Virginia corporation the right to dissent from, and obtain payment of the fair
value of their shares in the event of mergers, consolidations and certain other
corporate transactions. However, because F&M has more than 2,000 record
shareholders, unlike Potomac, shareholders of F&M are less likely to have rights
to dissent from mergers, consolidations and certain other corporate transaction
to which F&M is a party because Article 15 of the Virginia SCA provides that
holders of shares of a Virginia corporation which has shares listed on a
national securities exchange or which has at least 2,000 record shareholders are
not entitled to dissenters' rights unless certain requirements are met. For
additional information in this regard, see "The Affiliation - Rights of Dissent
and Appraisal."
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue (i) 20,000,000 shares of Common Stock, par Value
$2.00 per share, and (ii) 5,000,000 shares of serial Preferred Stock, without
par value, which may be issued in series with such powers, designations, and
rights as may be established from time to time by the Board of Directors. On
September 30, 1994, F&M had issued and outstanding 15,648,652 shares of F&M
Common Stock held by 7,518 shareholders of record. All outstanding shares of F&M
Common Stock are fully paid and nonassessable. No shares of Preferred Stock have
been issued.
COMMON STOCK
Holders of shares of F&M Common Stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
therefor. F&M's ability to pay dividends is dependent upon its earnings and
financial condition of F&M and certain legal requirements. Specifically, the
Federal Reserve has stated that bank holding companies should not pay dividends
except out of current earnings and unless the prospective rate of earnings
retention by the company appears consistent with its capital needs, asset
quality and overall financial condition. In addition, Virginia law precludes any
distribution to shareholders if, after giving it effect, (1) F&M would not be
able to pay its debts as they become due in the usual course of business; or (2)
F&M's total assets would be less than the sum of its total liabilities plus the
amount that would be needed, if F&M were to be dissolved at the time of the
distribution to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the distribution. Upon
the liquidation, dissolution or winding up of F&M, whether voluntary or
involuntary, holders of F&M Common Stock are entitled to share ratably, after
satisfaction in full of all liabilities, in all remaining assets of F&M
available for distribution. The dividend and liquidation rights of F&M Common
Stock are subject to the rights of any Preferred Stock that may be issued and
outstanding.
Holders of F&M Common Stock are entitled to one vote per share on all
matters submitted to shareholders. There are no cumulative voting rights in the
election of directors or preemptive rights to purchase additional shares of any
class of F&M's capital stock. Holders of F&M Common Stock have no conversion or
redemption rights. The shares of F&M Common Stock presently outstanding are, and
those shares of F&M Common Stock to be issued in connection with the Affiliation
will be when issued, fully paid and nonassessable. Since December 28, 1994, F&M
Common Stock has been listed for trading on the NYSE. Prior to its listing on
the NYSE, F&M Common Stock was traded on the Nasdaq/NMS.
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F&M maintains a Dividend Reinvestment and Stock Purchase Plan (the "DRP
Plan") providing for the purchase of additional shares of F&M Common Stock by
reinvestment of cash dividends paid on the outstanding shares of F&M Common
Stock and also by optional direct cash payments by shareholders. Dividends
reinvested are applied to the purchase of shares of F&M Common Stock at 95% of
the market value at the time of purchase. Optional cash purchases may be made at
100% of the market value of F&M Common Stock at the time of purchase. The DRP
Plan permits F&M, at its election, to use shares purchased in the
over-the-counter market or to use F&M's authorized and unissued or treasury
shares in order to satisfy the DRP Plan's requirements.
In addition, F&M maintains an Employee Stock Purchase Plan (the "ESP Plan")
providing that all F&M employees who have served F&M full time for over six
months may purchase shares of F&M Common Stock through payroll deduction. An
eligible employee who wishes to participate elects to contribute from 2% to 15%
of his or her actual adjusted base pay (actual base pay plus overtime and shift
premiums) by payroll deduction. In November, a participant may elect to bring
his or her total actual contribution up to 15% of his or her annual base pay.
Shares are sold by F&M to the ESP Plan fund on behalf of those participating
employees at 85% of the lesser market value on January 1 or December 31 of the
year. The maximum number of shares is limited for any calendar year to 50,000
plus shares available to be offered but not purchased in prior years. In 1993,
only 15,458 shares were issued pursuant to the ESP Plan. Accordingly, a total of
84,542 shares are available for issuance pursuant to the ESP Plan in 1994. The
administrator may decide to offer fewer than the maximum available number.
PREFERRED STOCK
The Board of Directors, without shareholder approval, is empowered to
authorize the issuance, in one or more series, of shares of Preferred Stock at
such times, for such purposes and for such consideration as it may deem
advisable. The Board of Directors is also authorized to fix before the issuance
thereof the designations, voting, conversion, preference and other relative
rights, qualifications and limitations of any such series of Preferred Stock.
The Board of Directors, without shareholder approval, may authorize the
issuance of one or more series of Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of F&M
Common Stock and, under certain circumstances, discourage an attempt by others
to gain control of F&M.
The creation and issuance of any additional series of Preferred Stock, and
the relative rights, designations and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
F&M, then existing market conditions and other factors that, in the judgment of
the Board of Directors, might warrant the issuance of Preferred Stock.
EXPERTS
The consolidated financial statements of F&M incorporated in this Proxy
Statement/Prospectus by reference to F&M's Annual Report on Form 10-K for the
year ended December 31, 1993 have been so incorporated in reliance upon the
report of Yount, Hyde & Barbour, P.C., independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as experts
in auditing and accounting.
The historical financial statements of Potomac contained in this Proxy
Statement/Prospectus have been so included in reliance upon the report of
Thompson & Greenspon & Co., P.C., independent certified public accountants,
given on their authority as experts in auditing and accounting.
OPINIONS
The validity of the shares of F&M Common Stock offered hereby is being
passed upon for F&M by LeClair, Ryan, Joynes, Epps & Framme, P.C., Richmond,
Virginia. LeClair, Ryan will deliver opinions to F&M and Potomac, respectively,
concerning certain federal income tax consequences of the Affiliation. See "The
Affiliation - Certain Federal Income Tax Consequences."
Certain matters relating to the Affiliation will be passed upon for Potomac
by Odin, Feldman & Pittleman, P.C., Fairfax, Virginia.
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SHAREHOLDER PROPOSALS
It is not anticipated that Potomac will hold a 1995 Annual Meeting of
Shareholders unless the Affiliation is not consummated prior to August 31, 1995.
If it is not consummated within that time period, the regular Annual Meeting of
Potomac will be held. Any shareholder proposals to be made at such Annual
Meeting must be in accordance with the Bylaws of Potomac.
OTHER MATTERS
The Potomac Board of Directors does not intend to bring any matter before
the Special Meeting other than as specifically set forth in the Notice of
Special Meeting of Shareholders, nor does it know of any matter to be brought
before the Special Meeting by others. If, however, any other matters properly
come before the Special Meeting, it is the intention of each of the proxyholders
to vote such proxy in accordance with the decision of a majority of the Potomac
Board of Directors.
53

<PAGE>
BANK OF THE POTOMAC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditor's Report........................................................................................... F-2
Balance Sheets as of December 31, 1993 and 1992........................................................................ F-3
Statements of Operations for the Three Years Ended December 31, 1993................................................... F-4
Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1993.............................. F-5
Statements of Cash Flows for the Three Years Ended December 31, 1993................................................... F-6
Notes to Financial Statements.......................................................................................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance Sheet as of September 30, 1994................................................................................. F-15
Statements of Operations for the Nine Months Ended September 30, 1994 and 1993......................................... F-16
Statements of Charges in Stockholders' Equity for the Nine Months Ended September 30, 1994 and 1993.................... F-17
Statements of Cash Flows for the Nine Months Ended September 30, 1994 and 1993......................................... F-18
Notes to Interim Financial Statements.................................................................................. F-19
</TABLE>

F-1

<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
Bank of the Potomac
Herndon, Virginia

We have audited the accompanying balance sheets of Bank of the Potomac for
the years ended December 31, 1993 and 1992, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 1993. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Bank of the Potomac, and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 1993, in conformity with generally accepted
accounting principles.

Thompson, Greenspon & Company, P.C.

Fairfax, Virginia
January 14, 1994
BANK OF THE POTOMAC
BALANCE SHEETS
December 31, 1993 and 1992

1993 1992

Assets
Cash and due from banks . . . . . $ 1,934,025 $ 1,694,497
Federal funds sold. . . . . . . . 450,000 2,225,000
Investment securities (Note 2). . 19,456,961 13,440,251
Loans receivable (Note 3) . . . . 30,340,688 28,905,119
Less allowance for possible
loan losses . . . . (356,718) (318,234)
Net loans. . . . . . . . . . . 29,983,970 28,586,885
Accrued interest receivable . . . 393,858 369,792
Bank premises and equipment,
net (Note 4). . . 433,877 458,513
Other assets (Note 5) . . . . . . 155,917 146,947

Total assets . . . . . . . . . $52,808,608 $46,921,885

Liabilities
Demand deposits:
Non-interest bearing . . . . . $ 4,695,476 $ 3,892,273
Interest bearing . . . . . . . 14,612,283 14,355,133
Savings deposits. . . . . . . . . 17,499,758 12,894,315
Time deposits (Note 6). . . . . . 8,502,327 8,864,789
Total deposits . . . . . . . . 45,309,844 40,006,510
Accrued interest payable . . . . . 30,106 29,119
Other accrued expenses . . . . . . 240,233 95,151

Total liabilities . . . . . . . 45,580,183 40,130,780

Stockholders' Equity
Common stock, $10 par value,
700,000 shares authorized; 325,000
issued and outstanding . . . . . . 3,250,000 3,250,000
Surplus . . . . . .. 3,250,000 3,250,000
Retained earnings . . . . . . . . 728,425 291,105

Total stockholders' equity . . 7,228,425 6,791,105

Total liabilities and
stockholders' equity. . . . . $52,808,608 $46,921,885

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
STATEMENTS OF OPERATIONS
Years Ended December 31, 1993, 1992 and 1991
<TABLE>
1993 1992 1991
<S> <C> <C> <C>
Interest Income
Interest and fees on loans . . . . $2,723,242 $2,710,361 $2,493,878
Interest on federal funds sold . . 79,194 91,872 86,561
Interest on investment securities:
U.S. Treasury and government
securities. . . . . . . . . . 780,288 647,719 759,024
Federal Reserve stock. . . . . 11,700 11,700 9,483
Interest on deposits in banks. . . 1,768 672 1,225
Total interest income. . . . . 3,596,192 3,462,324 3,350,171

Interest Expense
Interest on deposits. . . . . . . 1,261,045 1,405,688 1,669,837
Net interest income. . . . . . 2,335,147 2,056,636 1,680,334

Provision For Possible Loan Losses .
(Note 3). . . . . . . . . . . . . . 50,287 212,603 308,167
Net interest income after
provision for possible loan
losses . . . . . 2,284,860 1,844,033 1,372,167

Other Income
Service charges . . . . . . . . . 140,562 125,710 93,117
Other . . . . . . . . . . . . . . 52,010 50,093 74,294
Total other income . . . . . . 192,572 175,803 167,411

2,477,432 2,019,836 1,539,578

Operating Expenses
Officers and employees
compensation and benefits. . . . 835,871 765,510 676,408
Occupancy expense . . . . . . . . 358,712 355,458 344,641
FDIC assessment . . . . . . . . . 90,110 79,508 57,747
Computer services . . . . . . . . 89,511 82,919 68,316
Virginia franchise tax. . . . . . 54,602 45,573 54,692
Other real estate owned expenses. 138 51,600 24,024
Other operating expenses. . . . . 372,291 390,311 311,731
Total operating expenses . . . 1,801,235 1,770,879 1,537,559

Income Before Income Taxes . . . . . 676,197 248,957 2,019

Applicable income taxes (Note 7) . . 214,502 59,124 500

Income before cumulative effect of
change in accounting principle . . 461,695 189,833 1,519

Cumulative effect on prior years
of change in method of accounting
for income taxes (Notes 1 and 7) . . -- 68,500 --

Net income . . . . . . . . . . $ 461,695 $ 258,333 $ 1,519

Income per Common Share, based on
325,000 shares in 1993, 1992 and
1991 (Note 1) . . . . . . . . . . . $ 1.42 $ .79 $ .0047

</TABLE>

The Notes to Financial Statements are an integral part of these statements.
BANK OF THE POTOMAC
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991

<TABLE>
Number
of Retained
Shares Par Value Surplus Earnings Totals
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1990 . . . . . 325,000 $3,250,000 $3,250,000 $ 31,253 $6,531,253

Net income . . . . . . . . . . -- -- -- 1,519 1,519

Balance,
December 31, 1991 . . . . . 325,000 3,250,000 3,250,000 32,772 6,532,772

Net income . . . . . . . . . . -- -- -- 258,333 258,333

Balance,
December 31, 1992 . . . . . 325,000 3,250,000 3,250,000 291,105 6,791,105

Dividend Paid. . . . . . . . -- -- -- (24,375) (24,375)

Net income . . . . . . . . . -- -- -- 461,695 461,695

Balance, December 31, 1993 . 325,000 $3,250,000 $3,250,000 $728,425 $7,228,425

</TABLE>

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1993, 1992 and 1991

<TABLE>
1993 1992 1991
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income . . . . . . . . $ 461,695 $ 258,333 $ 1,519
Noncash items included in net income
Depreciation and amortization. . . . 141,502 148,748 136,820
Provision for possible loan losses . 50,287 212,603 70,869
Write-down of other real estate
owned . . . . . . . . . . . . . . . -- 25,000 --
(Increase) Decrease in
Accrued interest receivable. . . . (24,066) (4,062) (28,434)
Other assets . . . . . . . . . . . (14,219) (10,595) (369,040)
Increase (Decrease) in
Accrued interest payable . . . . . 987 (26,596) (7,727)
Other accrued expenses . . . . . . 145,082 43,557 (51,663)
Net cash provided by
operating activities. . . . . 761,268 646,988 (247,656)

Cash Flows From Investing Activities
Federal funds sold, net . . . . . . . . 1,775,000 (1,775,000) 1,175,000
Securities purchased under reverse
repurchase agreements, net . . . . . -- 1,000,000 (1,000,000)
Acquisition of bank premises and
equipment . . . . . . . . . . . . . (111,616) (43,797) (81,829)
Loans, net . . . . . . . . . . . . . . (1,447,373) (1,030,838) (7,718,963)
Purchase of investment securities . . (12,516,710) (9,235,277) (7,009,314)
Proceeds from sale of other real
estate owned. . . . . . . . . . . -- 270,000 --
Proceeds from maturity of investment
securities. . . . . . . . . . . . 6,500,000 5,000,000 6,401,523
Net cash used by investing
activities . . . . . . . . . . . (5,800,699) (5,814,912) (8,233,583)

Cash Flows From Financing Activities
Demand deposits, net . . . . . . . . 1,060,353 1,968,544 5,312,936
Savings deposits, net. . . . . . . . 4,605,443 7,085,527 3,549,717
Time deposits, net . . . . . . . . . (362,462) (3,767,282) 109,168
Dividends paid . . . . . . . . . . . (24,375) -- --
Net cash provided by financing
activities . . . . . . . . . . 5,278,959 5,286,789 8,971,821

Net increase in cash and cash equivalents. 239,528 118,865 490,582

Cash and due from banks, beginning
of year. . . . . . . . . . . . . . . . 1,694,497 1,575,632 1,085,050

Cash and due from banks, end of
year . . . . . . . . . . . . . . . . . $1,934,025 $1,694,497 $1,575,632

</TABLE>

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Bank follows generally accepted accounting principles and reporting
practices applicable to the banking industry. Significant accounting
policies are summarized below.

Investment Securities

Investment securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of securities
are determined by the specific identification method.

Financial Accounting Standards Board (FASB) has issued Statement No. 115,
"Accounting for Certain Investment in Debt and Equity Securities" which will
be effective beginning January 1, 1994. The Bank anticipates that adoption
of this new accounting standard will not have a material effect on its
financial statements in future years.

Federal Funds Purchased/Sold

The Bank is required to maintain legal cash reserves, computed by applying
prescribed percentages to its various types of deposits. When the Bank's
cash reserves are in excess of that required, it may lend the excess to other
banks on a daily basis. Conversely, when cash reserves are less than
required, the Bank borrows funds on a daily basis.

Loans and Loan Fees

Loans are stated at the principal amount outstanding, net of deferred loan
fees. Interest on loans is generally computed using the simple interest
method. Loan fees and related direct loan origination costs are deferred and
recognized as an adjustment of yield over the life of the loan or currently
upon the sale or repayment of the loans.

Interest on all categories of loans is accrued based upon the principal
amounts outstanding. The accrual of interest income is discontinued on loans
which are past due ninety or more days as to principal or interest payments,
except for certain guaranteed loans and other limited exceptions. When loans
are placed on nonaccrual status, interest accrued in the current year is
charged against interest income, and interest accrued in prior years is
charged to the allowance for loan losses. Loans may be reinstated to accrual
status when all payments are brought current, and, in the opinion of
management, collection of the remaining balance can reasonably be expected.
The classification of a loan as nonaccrual is not necessarily indicative of a
potential loan loss.

Allowance for Possible Loan Losses

The Bank grants commercial, residential and consumer loans to customers
located in Northern Virginia. Although the Bank has a diversified portfolio,
a substantial number of loans are collateralized by real estate.

The allowance is established to absorb possible future losses on existing
loans. It is maintained at a level considered adequate by management to
provide for potential losses based on management's evaluation of the loan
portfolio, historical loan loss experience and prevailing and anticipated
economic conditions.

The allowance is increased by provisions for loan losses charged to operating
expense and reduced by net chargeoffs. The provisions are based on
management's estimate of net realizable value or fair value of the
collateral, as applicable, considering the current and future operating or
sales conditions. These estimates are susceptible to changes that could
result in a material adjustment to future results of operations.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Bank Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the asset life using
the straight-line method. Computer equipment and software, and furniture and
equipment are depreciated over estimated useful lives of five and seven years
using the straight-line method.

Other Real Estate Owned

Other real estate owned includes properties acquired through foreclosure or
other proceedings in satisfaction of indebtedness. At the date of
acquisition, such property is recorded at the lower of the recorded
investment in the related receivable or net realizable value for single
family residential or fair value. Write-downs at the date of acquisition are
charged to the allowance for loans losses. Subsequent declines in market
value, operating expenses and gains or losses on disposition of other real
estate are reflected in other expenses. As of December 31, 1993 and 1992,
the Bank had no other real estate owned.

Stockholders' Equity

The Bank was capitalized through a private offering circular dated November
20, 1987, for $6,500,000. Capital funds were allocated to capital stock,
$3,250,000, and to surplus, $3,250,000. A dividend of 7.5 cents per share
was declared and paid in 1993. Total dividend paid to all stockholders
amounted to $24,375.

Income Taxes

In 1992, the Bank elected early adoption of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". FASB Statement No. 109 utilizes an
asset and liability approach to accounting for income taxes. The objective is
to recognize the amount of income taxes payable or refundable in the current
year based on the Bank's income tax return and the deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Bank's financial statements or tax returns.

The asset and liability method accounts for deferred income taxes by applying
enacted statutory rates to temporary differences, the difference between
financial statement amounts and tax bases of assets and liabilities.
Deferred income tax liabilities or assets are adjusted to reflect changes in
tax laws or rates in the year of enactment.

The effect of this accounting change in 1992 was to increase net earnings by
approximately $52,000 consisting of an increase of approximately $68,500 from
the cumulative effect on prior years and a decrease of approximately $16,500
from the effect on 1992 income tax expense.

The Bank is subject to a bank franchise tax in lieu of state income taxes.

Income per Common Share

Income per common share, is based on the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares result
from the assumed exercise of outstanding stock options that have a dilutive
effect when applying the treasury stock method. The options (see Notes 10
and 11) outstanding at December 31, 1993, 1992 and 1991 did not have a
dilutive effect on the calculation of income per share and, therefore, were
not included in the computation. The number of shares used in the
computation of income per common share was 325,000 for 1993, 1992 and 1991.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Statement of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks. The Bank has deposits in financial
institutions in excess of amounts insured by the Federal Deposit Insurance
Corporation.

Cash paid for interest amounted to $1,260,001 in 1993, $1,432,284 in 1992 and
$1,677,564 in 1991.

Net income taxes paid (refunded) amounted to $73,664 in 1993, $(24,600) in
1992 and $134,581 in 1991.

Fair Value Disclosures

In December, 1991, the FASB issued SFAS No. 107 which requires entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial position, for
which it is practical to estimate fair values. The statement is effective
for financial statements issued for fiscal years ending after December 15,
1992, except for entities with less than $150 million in total assets. For
those entities, the statement is effective for fiscal years ending after
December 15, 1995. The Bank will implement SFAS No. 107 in 1995 or in an
earlier year if the Bank's assets exceed $150 million. Adoption of SFAS No.
107 is not expected to have a material impact on the Bank.

Impairment of Loans

In May, 1993, the FASB issued SFAS No. 114 which requires that impaired loans
within its scope be measured based on the present value of expected cash
flows discounted at the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The statement is effective for financial statements
issued for fiscal years beginning after December 15, 1994. The Bank will
implement SFAS No. 114 in 1995. Adoption will be accounted for prospectively
and is not expected to have a material impact on the Bank.

Required Depository Reserves

The Bank is required by regulatory authorities to maintain a specified
portion of its assets in the form of reserves. Such reserves consist of
vault cash and balances maintained at the Federal Reserve Bank. The average
balance required to be maintained at the Federal Reserve Bank for the year
ended December 31, 1993, was approximately $469,000.

Capital Requirements

All banks are required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the Federal Deposit Insurance Corporation.
At December 31, 1993, banks are required to have minimum Tier 1 and Total
capital ratios of 4.00 percent and 8.00 percent, respectively. The Bank's
actual ratios at that date were 24.41 percent and 25.61 percent,
respectively.

Reclassifications

Certain amounts from December 31, 1991 have been reclassified to conform to
the presentation of 1992 and 1993.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

2. INVESTMENT SECURITIES

The carrying amounts of investment securities as shown in the balance sheet
of the Bank and their approximate market values at December 31, were as
follows:

<TABLE>

Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1993:
U.S. Treasury securities . . . . $12,957,106 $121,475 $21,782 $13,056,799
U.S. Government agencies . . . . 5,799,935 23,659 13,594 5,810,000
Municipal securities . . . . . . 504,920 -- 7,074 497,846
Other securities . . . . . . . . 195,000 -- -- 195,000
$19,456,961 $145,134 $42,450 $19,559,645

December 31, 1992:
U.S. Treasury securities . . . . $ 8,452,783 $ 62,436 $ 8,730 $ 8,506,489
U.S. Government agencies . . . . 4,792,468 46,283 4,688 4,834,063
Other securities . . . .. . . . 195,000 -- -- 195,000
$13,440,251 $108,719 $13,418 $13,535,552

</TABLE>

Assets, principally securities, carried at approximately $500,000 at
December 31, 1993 and 1992, were pledged to secure public deposits for other
purposes required or permitted by law. Federal Reserve Board common stock
is included in other securities at an original cost and estimated fair value
of $195,000 at December 31, 1993 and 1992. This stock is not traded.

The maturities of investment securities at December 31, 1993, were as
follows:

Carrying Market
Amount Value

Due in one year or less. . . . . $ 6,973,117 $ 6,895,549
Due from one to five years . . . 10,889,590 10,946,223
Due from five and over . . . . . 1,399,254 1,422,873
Federal Reserve Board
common stock . . . . . . . . . 195,000 195,000
$19,456,961 $19,559,645

The maturities of investment securities at December 31, 1992, were as
follows:

Carrying Market
Amount Value

Due in one year or less. . . . . $ 4,974,930 $ 5,012,740
Due from one to five years . . . 7,774,577 7,838,906
Due from five to ten years . . . 495,744 488,906
Due after ten years. . . . . . . -- --
Federal Reserve Board
common stock . . . . . . . . . 195,000 195,000
$13,440,251 $13,535,552

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

3. LOANS RECEIVABLE

Loans receivable include the following:

1993 1992

Commercial . . . . . . . . . . . $ 5,995,970 $ 5,895,158
Real estate construction . . . . 867,783 576,080
Real estate mortgage:
Residential (1-4 family). . . 8,633,491 5,471,811
Home equity lines . . . . . . 2,056,712 2,899,054
Nonfarm, nonresidential (1) . 11,814,144 11,498,186
Real estate mortgage
subtotal. . . . . . . . . 22,504,347 19,869,051
Consumer installment loans to
individuals. . . . . . . . . . 1,066,859 1,172,303
Obligations (other than
securities and leases) of states
and political subdivisions in
the U.S. . . . . . . . . . . . -- 1,500,000
All other loans. . . . . . . . . 6,396 1,591
Total loans. . . . . . . . 30,441,355 29,014,183
Less: unearned income . . . . . (100,667) (109,064)
Loans, net of unearned income. . $30,340,688 $28,905,119

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

Loans on which the accrual of interest has been discontinued at December 31,
1993 amounted to $20,320 and $200,000 in 1992. Had interest been accrued on
those loans, such income would have approximated $403 in 1993 and $13,000 in
1992.

An analysis of the allowance for loan losses is as follows:

1993 1992
Loan loss reserve:
Beginning balance . . . . . . $318,234 $ 281,436
Additions . . . . . . . . . . 50,287 212,603
Charge-offs . . . . . . . . . (11,803) (176,290)
Recoveries. . . . . . . . . . -- 485
Ending balance . . . . . . $356,718 $ 318,234

4. BANK PREMISES AND EQUIPMENT

Bank premises and equipment includes the following:

1993 1992

Computer equipment and software. $ 322,769 $ 234,257
Leasehold improvements . . . . . 247,525 247,525
Furniture and equipment. . . . . 490,453 467,349
1,060,747 949,131
Less accumulated depreciation. . (626,870) (490,618)
$ 433,877 $ 458,513

Depreciation of bank premises and equipment charged to expense amounted to
$136,252 in 1993, $141,748 in 1992 and $129,820 in 1991.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

5. OTHER ASSETS

Other assets include the following:

1993 1992

Prepaid expenses . . . . . . . $ 55,732 $ 51,389
Deferred income tax asset. . . 95,273 89,000
Miscellaneous other assets 4,912 1,308
$155,917 $146,947

The organization costs, included in miscellaneous other assets, of $35,000
are being amortized over five years under the straight-line method.
Amortization charged to expense amounted to $5,250 in 1993, $7,000 in 1992
and 1991.

6. TIME DEPOSITS

Time certificates of deposit in denominations of $100,000 or more, contained
in time deposits as of December 31, were as follows:

1993 1992
Number Amount Number Amount
Time certificates of
deposit in denominations
of $100,000 or more . 15 $1,708,807 15 $1,718,335

7. INCOME TAXES

The cumulative effect of adopting FASB Statement No. 109 at the beginning of
1992 is reported in the 1992 statement of operations (see Note 1).

The provision for income taxes charged to continuing operations for the
years ended December 31, was as follows:

1993 1992

Current income taxes . . . . . $220,775 $49,224
Deferred tax (benefit) expense . . (6,273) 9,900
Total tax expense. . . . . . . $214,502 $59,124

Deferred tax assets (liabilities) are comprised of the following at December
31:

1993 1992

Unearned loan fees . . . . . . $ 23,894 $ 30,669
Organization costs . . . . . . -- 4,692
Loan loss reserve. . . . . . . 78,025 67,549
Gross deferred tax assets . 101,919 102,910

Bank premises and equipment. . (6,646) (13,910)
Gross deferred tax liability. (6,646) (13,910)

Net deferred tax asset. . . $ 95,273 $ 89,000

Net deferred tax assets for 1993 and 1992 are recorded in other assets
(see Note 5).

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

7. INCOME TAXES (continued)

The income tax provision differs from the amount of income tax determined by
applying the U.S. Federal income tax rate to pretax income for the years
ended December 31, due to the following:

<TABLE>
Years Ended December 31
1993 1992 1991
% of % of % of
Pretax Dollar Pretax Dollar Pretax Dollar
Income Amount Income Amount Income Amount
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax expense $229,907 32% $ 84,645 34% $303 15%
Increase (decrease) from
income taxes resulting
from:
Tax exempt income (20,405) (3) (32,321) (13) -- 0
Other 5,000 0 6,800 3 197 10
$214,502 29% $59,124 24% $500 25%

8. OPERATING LEASES

The Bank entered into a ten-year lease with two five-year renewal options
for its permanent operations site from a partnership, which is owned by
certain directors and/or associates of those directors who are also
shareholders of the Bank. Rent payments commenced June 1, 1989. Lease
payments under the lease agreement are $10,055 monthly plus applicable real
estate taxes and common area maintenance. The following are the future
minimum lease payments:

Year ending December 31:
1994. . . . . $120,660
1995. . . . . 120,660
1996. . . . . 120,660
1997. . . . . 120,660
1998. . . . . 120,660
Thereafter. . 60,300
Total. . $663,600

Rent expense amounted to $209,906 in 1993, $205,047 in 1992 and $199,350 in
1991.

9. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to and
accepted deposits from directors, executive officers, employees and their
associates. These transactions have been made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons. Directors and
executive officers were indebted to the Bank for loans totalling $1,830,244
and $1,846,896 at December 31, 1993 and 1992, respectively. Deposits of
directors and officers totalled $3,432,958 and $3,071,308 at December 31,
1993 and 1992, respectively. The Bank's corporate counsel is a firm in
which a director has an interest. From time to time, the Bank contracts for
services with companies which are related directly or indirectly to board
members.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1992

10. DIRECTORS' STOCK OPTION PLAN

On March 22, 1989, the shareholders approved a stock option plan and granted
options for 45,000 shares of the Bank's common stock to eligible directors.
Under the terms of the plan the purchase price of the stock will be $20.00
per share. The options are exercisable for a period of five years from the
date of the grant. As of December 31, 1993, no options had been exercised.

11. INCENTIVE STOCK OPTION PLAN

On March 22, 1989, the shareholders approved a stock option plan allocating
5,000 shares of the Bank's common stock to eligible officers and employees.
On July 31, 1991, the Bank granted options for 2,000 shares to eligible
officers and employees. Under the terms of the plan the purchase price of
the stock will be $20.14 per share. The options are exercisable for a
period of five years from the date of the grant. As of December 31, 1993,
no options had been exercised.

12. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank incurs certain contingent
liabilities that are not reflected in the accompanying financial statements.
These contingent liabilities include standby letters of credit. At December
31, commitments under standby letters of credit approximated $490,300 in
1993 and $640,600 in 1992, and unfunded commitments approximated $5,064,219
in 1993 and $3,311,648 in 1992. The Bank does not anticipate any material
losses as a result of these commitments.

The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The amount of
collateral obtained if deemed necessary by the Bank upon extension of credit
is based on management's credit evaluation of the counter-party. Collateral
held varies but may include cash, securities, accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties and residential properties.

The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that
the liabilities, if any, arising from such litigation and claims will not be
material to the financial position.

13. SUBSEQUENT EVENTS

The Bank declared a dividend of 15 cents a share on January 12, 1994. The
dividend is payable to shareholders of record on February 1, 1994, and
payable on February 28, 1994.

BANK OF THE POTOMAC
BALANCE SHEET
September 30, 1994
(Unaudited)

Assets
Cash and due from banks . . . . . . . . . $ 1,974,184
Federal funds sold. . . . . . . . . . . . 2,250,000
Investment Securities:
Held to maturity . . . . . . . . . . . 15,675,299
Available for sale . . . . . . . . . . 3,848,848
Loans receivable . . . . . . . . . . . . 30,732,847
Less allowance for possible loan losses . (360,276)
Net loans . . . . . . . . . . . . . 30,372,571
Accrued interest receivable . . . . . . . 339,982
Bank premises and equipment, net. . . . . 364,841
Other assets . . . . . . . . . . . . . . 403,360

Total assets . . . . . . . . . . . . . $55,229,085

Liabilities
Demand deposits:
Non-interest bearing . . . . . . . . . $ 5,643,998
Interest bearing . . . . . . . . . . . 14,980,730
Savings deposits. . . . . . . . . . . . . 18,563,402
Time deposits . . . . . . . . . . . . . . 8,257,188
Total deposits . . . . . . . . . . . . 47,445,318

Accrued interest payable. . . . . . . . . 30,801
Other accrued expenses. . . . . . . . . . 314,131
Total liabilities. . . . . . . . . . . 47,790,250

Stockholders' Equity:
Common stock, $10 par value, 700,000 shares
authorized; 325,000 issued and
outstanding . . . . . . . . . . . . . . 3,250,000
Surplus . . . . . . . . . . . . . . . . . 3,250,000
Retained earnings . . . . . . . . . . . . 1,031,009
Unrealized loss on securities available for
sale, net . . . . . . . . . . . . . . . . (92,174)
Total stockholders' equity . . . . . . 7,438,835

Total liabilities and stockholders' equity . $55,229,085

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1994 and 1993
(Unaudited)

1994 1993
Interest Income
Interest and fees on loans. . . . . $1,987,869 $2,029,763
Interest on federal funds sold. . . 86,946 59,113
Interest on investment securities:
U.S. Treasury and government securities
Held to maturity. . . . . . . 596,197 566,252
Available for sale. . . . . . 111,003 --
Federal Reserve stock. . . . . . 8,775 8,775
Interest on deposits in banks . . . 1,254 1,607
Total interest income. . . . . . 2,792,044 2,665,510

Interest Expense
Interest on deposits. . . . . . . . 1,022,410 932,526
Net interest income. . . . . . . 1,769,634 1,732,984

Provision for Possible Loan Losses . . . (51,792) 38,630

Net interest income after provision
for possible loan losses. . . 1,821,426 1,694,354

Other Income
Service charges. . . . . . . . . . . 96,048 146,561
Other. . . . . . . . . . . . . . . . 43,412 2,388
Total other income . . . . . . . 139,460 148,949

Operating Expenses
Officers and employees compensation
and benefits. . . . . . . . . . . 667,301 605,922
Occupancy expense . . . . . . . . . 258,972 268,904
Computer services . . . . . . . . . 71,026 65,481
FDIC assessment . . . . . . . . . . 76,654 66,982
Virginia franchise tax . . . . . . . 39,377 40,952
Other operating expenses . . . . . . 322,992 287,375
Total operating expenses . . . . 1,436,322 1,335,616

Income Before Income Taxes . . . . . . 524,564 507,687

Applicable income taxes . . . . . . . 173,230 158,915

Net Income . . . . . . . . . . . $ 351,334 $ 348,772

Income per Common Share, based on 325,000
shares in 1994 and 1993 $ 1.08 $ 1.07

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1994 and 1993
(Unaudited)

</TABLE>
<TABLE>
Number
of Retained
Shares Par Value Surplus Earnings Totals
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 . . . 325,000 $3,250,000 $3,250,000 $291,105 $6,791,105

Net Income . . . . . . -- -- -- 348,772 348,772

Dividend paid. . . . . -- -- -- (24,375) (24,375)

Balance. . . . . . . . 325,000 $3,250,000 $3,250,000 $615,502 $7,115,502

Balance,
January 1, 1994 . . 325,000 $3,250,000 $3,250,000 $728,425 $7,228,425

Net Income . . . . . . -- -- -- 351,334 351,334

Net Unrealized loss
on investments . . -- -- -- (92,174) (92,174)

Dividend Paid. . . . -- -- -- (48,750) (48,750)
325,000 $3,250,000 $3,250,000 $938,835 $7,438,835
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1994 and 1993
(Unaudited)

1994 1993
Cash Flows from Operating Activities
Net income . . . . . . . $ 351,334 $ 348,772
Noncash items included in net income:
Depreciation and amortization. . . . . . 79,898 109,671
Provision for possible loan losses . . . 3,559 26,826
(Increase) Decrease in
Accrued interest receivable . . . . . . 36,963 38,677
Other assets . . . . . . . . . . . . . (202,682) (64,228)
Increase (Decrease) in
Accrued interest payable . . . . . . . 695 1,797
Other accrued expenses. . . . .. . . . 73,630 211,511
Net cash provided by
Operating activities. . . . . . . 343,397 673,026

Cash Flows from Investing Activities
Federal funds sold, net . . . . . . . . . . (1,800,000) 325,000
Acquisition of bank premises and equipment. (10,863) (84,924)
Loans, net . . . . . . . (375,770) (1,152,651)
Purchase of investment securities . . . . . (8,506,840) (8,540,698)
Proceeds from maturity of investment
securities . . . . . . . . . . . . . . . . 8,300,000 5,500,000
Net cash used by investing activities. . (2,393,473) (3,953,273)

Cash Flows from Financing Activities
Demand deposits, net. . . . . . . . . . . . 1,316,492 (460,434)
Savings deposits, net . . . . . . . . . . . 1,063,644 6,118,208
Time deposits, net. . . . . . . . . . . . . (245,139) (2,515,316)
Dividends paid. . . . . . . . . . . . . . . (48,750) (24,375)
Net cash provided by financing activities. 2,086,247 3,118,083

Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . 36,171 (162,164)

Cash and due from banks, beginning of period . 1,938,013 1,694,497

Cash and due from banks, end of period . . . . $ 1,974,184 $ 1,532,333

The Notes to Financial Statements are an integral part of these statements.

BANK OF THE POTOMAC
NOTES TO FINANCIAL STATEMENTS
September 30, 1994 and 1993
(Unaudited)

1. In the opinion of management, the accompanying unaudited financial
statements contain all the adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September
30, 1994 and the results of operations, changes in stockholders' equity and
cash flows for the nine months ended September 30, 1994 and 1993.

2. The results of operations for the nine month periods ended September 30,
1994 and 1993, are not necessarily indicative of the results to be expected
for the full year.

<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
F&M NATIONAL CORPORATION
AND
BANK OF THE POTOMAC, INC.
NOVEMBER 18, 1994

<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1. THE AFFILIATION AND RELATED MATTERS................................................................... I-4
1.1 The Affiliation....................................................................................... I-4
1.2 Conversion of Potomac Stock........................................................................... I-4
1.3 Directors, Officers and Employees..................................................................... I-4
1.4 The Closing and Effective Date........................................................................ I-5
1.5 Definitions........................................................................................... I-5
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF POTOMAC............................................................. I-5
2.1 Organization, Standing and Power...................................................................... I-5
2.2 Authorized and Effective Agreement.................................................................... I-5
2.3 Capital Structure..................................................................................... I-6
2.4 Financial Statements; Minute Books.................................................................... I-6
2.5 Material Adverse Change............................................................................... I-6
2.6 Absence of Undisclosed Liabilities.................................................................... I-6
2.7 Legal Proceedings; Compliance with Laws............................................................... I-7
2.8 Tax Matters........................................................................................... I-7
2.9 Property.............................................................................................. I-7
2.10 Employee Benefit Plans................................................................................ I-7
2.11 Insurance............................................................................................. I-7
2.12 Allowance for Loan Losses............................................................................. I-8
2.13 Brokers and Finders................................................................................... I-8
2.14 Statements True and Correct........................................................................... I-8
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF F&M................................................................. I-8
3.1 Organization, Standing and Power...................................................................... I-8
3.2 Organization, Standing and Power of F&M Subsidiaries.................................................. I-8
3.3 Authorized and Effective Agreement.................................................................... I-9
3.4 Capital Structure..................................................................................... I-9
3.5 Financial Statements.................................................................................. I-9
3.6 Material Adverse Change............................................................................... I-10
3.7 Absence of Undisclosed Liabilities.................................................................... I-10
3.8 Legal Proceedings; Compliance with Laws............................................................... I-10
3.9 Tax Matters........................................................................................... I-10
3.10 Employee Benefit Plans................................................................................ I-10
3.11 Allowance for Loan Losses............................................................................. I-11
3.12 Statements True and Correct........................................................................... I-11
ARTICLE 4. COVENANTS AND AGREEMENTS.............................................................................. I-11
4.1 Investigation and Confidentiality..................................................................... I-11
4.2 Registration Statement; Shareholder Approval.......................................................... I-11
4.3 Operation of the Business of Potomac.................................................................. I-12
4.4 Dividends............................................................................................. I-13
4.5 Regulatory Filings.................................................................................... I-13
4.6 Public Announcements.................................................................................. I-13
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 4
(Cont.)
4.7 Accounting Treatment.................................................................................. I-13
4.8 Affiliates............................................................................................ I-13
4.9 Benefit Plan.......................................................................................... I-13
4.10 Indemnification....................................................................................... I-14
4.11 Potomac Stock Options................................................................................. I-14
ARTICLE 5. CONDITIONS TO THE AFFILIATION......................................................................... I-14
5.1 General Conditions.................................................................................... I-14
5.2 Conditions to Obligations of F&M...................................................................... I-15
5.3 Conditions to Obligations of Potomac.................................................................. I-15
ARTICLE 6. TERMINATION........................................................................................... I-16
6.1 Termination........................................................................................... I-16
6.2 Effect of Termination................................................................................. I-16
6.3 Survival of Representations, Warranties and Covenants................................................. I-17
6.4 Expenses.............................................................................................. I-17
ARTICLE 7. GENERAL PROVISIONS.................................................................................... I-17
7.1 Entire Agreement...................................................................................... I-17
7.2 Binding Effect; No Third-Party Rights................................................................. I-17
7.3 Waiver and Amendment.................................................................................. I-18
7.4 Governing Law......................................................................................... I-18
7.5 Notices............................................................................................... I-18
7.6 Counterparts.......................................................................................... I-18
7.7 Severability.......................................................................................... I-19
</TABLE>

EXHIBIT A -- PLAN OF SHARE EXCHANGE
I-3

<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 18, 1994, by and between F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), and BANK OF THE POTOMAC, INC., a Virginia banking
corporation ("Potomac").
WITNESSETH:
WHEREAS, F&M and Potomac have agreed in principle to the affiliation of
their two companies through a share exchange under Virginia law, as a result of
which Potomac will become a wholly-owned subsidiary of F&M, all as more
specifically provided in this Agreement and the Plan of Share Exchange in the
form attached hereto as Exhibit A (the "Plan of Share Exchange"); and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby;
NOW, THEREFORE, in consideration of the mutual warranties, covenants and
agreements set forth herein, the parties agree as follows.
ARTICLE 1
THE AFFILIATION AND RELATED MATTERS
1.1 THE AFFILIATION
Subject to the terms and conditions of this Agreement, at the Effective
Date as defined in Section 1.4 hereof, Potomac shall become a wholly-owned
subsidiary of F&M through the exchange of each outstanding share of common stock
of Potomac for shares of the common stock of F&M in accordance with Section 1.2
of this Agreement and the Plan of Share Exchange (the "Affiliation").
1.2 CONVERSION OF POTOMAC STOCK
At the Effective Date, by virtue of the Share Exchange and without any
action on the part of the holders thereof, each share of common stock, par value
$10.00 per share, of Potomac ("Potomac Common Stock") issued and outstanding
immediately prior to the Effective Date (other than Dissenting Shares as defined
in the Plan of Share Exchange) shall cease to be outstanding and shall be
converted into and exchanged for shares of common stock, par value $2.00 per
share, of F&M ("F&M Common Stock") pursuant to the terms and conditions set
forth in the Plan of Share Exchange, which terms are incorporated herein and
made a part of this Agreement by reference.
1.3 DIRECTORS, OFFICERS AND EMPLOYEES
The directors, officers and employees of Potomac will not change as a
result of the Affiliation, except that F&M shall be permitted to designate one
of its officers to serve as a member of Potomac's Board of Directors from and
after the Effective Date.
1.4 THE CLOSING AND EFFECTIVE DATE
Subject to Section 6.1, the closing of the transactions contemplated by
this Agreement and the Plan of Share Exchange shall take place at such place as
may be mutually agreed upon by the parties (the "Closing"). The Affiliation will
become effective on the date shown on the Certificate of Share Exchange issued
by the State Corporation Commission of Virginia effecting the Affiliation (the
"Effective Date"). Unless otherwise agreed upon in writing, subject to the
conditions to the obligations of the parties to effect the Affiliation as set
forth in Article 5, the parties shall use their best efforts to cause the
Effective Date to occur on or before the tenth day of the month following the
month in which the conditions set forth in Article 5 are satisfied.
1.5 DEFINITIONS
Any term defined in this Agreement and the Plan of Share Exchange shall
have the meaning ascribed to it for purposes of this Agreement. In addition:
I-4

<PAGE>
(a) the term "best knowledge" when used with respect to a party shall mean
the knowledge, after due and diligent inquiry, of any "Executive Officer" of
such party, as such term is defined in Regulation O of the Federal Reserve
Board;
(b) the term "Previously Disclosed" by a party shall mean information set
forth in a written disclosure letter that is delivered by that party to the
other party prior to the execution of this Agreement and specifically designated
as information "Previously Disclosed" pursuant to this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF POTOMAC
Potomac represents and warrants to F&M as follows:
2.1 ORGANIZATION, STANDING AND POWER
Potomac is a bank duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia with full corporate power and
authority to carry on a commercial banking business as now conducted.
2.2 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) Potomac has all requisite corporate power and authority to enter into
and (subject to the receipt of all necessary governmental approvals and the
approval of the shareholders of Potomac of this Agreement and the Plan of Share
Exchange) to perform all of its obligations under this Agreement and the Plan of
Share Exchange. The execution, adoption and delivery of this Agreement and the
Plan of Share Exchange and the consummation of the Affiliation have been duly
and validly authorized by all necessary corporate action on the part of Potomac,
except the approval of shareholders. This Agreement and the Plan of Share
Exchange represent the legal, valid, and binding obligations of Potomac,
enforceable against Potomac in accordance with their respective terms, in each
case subject to (i) bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws affecting the enforcement of
rights of creditors of FDIC-insured institutions or the enforcement of
creditors' rights generally, (ii) laws relating to the safety and soundness of
depository institutions and (iii) general principles of equity.
(b) Neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by Potomac with any of
the provisions hereof will: (i) conflict with or result in a breach of any
provision of Potomac's Articles of Incorporation or Bylaws; (ii) except as
Previously Disclosed, constitute or result in the breach of any term, condition
or provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or asset of
Potomac pursuant to any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation, or (iii) subject to the receipt of all required
regulatory approvals, violate any order, writ, injunction, decree, statute, rule
or regulation applicable to Potomac.
2.3 CAPITAL STRUCTURE
The authorized capital stock of Potomac consists of 700,000 shares of
common stock, par value $10.00 per share. As of the date hereof, there were
325,000 shares of Potomac Common Stock issued and outstanding. All outstanding
shares of Potomac Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable and have not been issued in violation of the
preemptive rights of any person. Except as Previously Disclosed, there are no
outstanding options, warrants or other rights to subscribe for or purchase from
Potomac any capital stock of Potomac or securities convertible into or
exchangeable for capital stock of Potomac.
2.4 FINANCIAL STATEMENTS; MINUTE BOOKS
The Potomac Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the financial position of Potomac as of the
dates indicated and the results of operations, changes in shareholders' equity
and statements of cash flows for the periods then ended (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments that are not
material in amount or effect) in conformity with generally accepted accounting
principles applicable to financial institutions applied on a consistent basis.
The minute books of Potomac contain legally sufficient records of all meetings
and other corporate actions of its shareholders and Board of Directors
(including committees of its Board of Directors). The Potomac Financial
Statements shall mean (i) the balance sheets of Potomac as of December 31, 1993
and 1992 and the related statements of income, shareholders' equity and cash
flows for each of the three years ended
I-5

<PAGE>
December 31, 1993, 1992 and 1991 (including related notes and schedules, if any)
and (ii) the balance sheets of Potomac and related statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) with respect to periods ended subsequent to December 31, 1993, including
the balance sheet and related statement of income with respect to the month end
on which the Exchange Ratio (as defined in Section 2.1(a) of the Plan of Share
Exchange) is based.
2.5 MATERIAL ADVERSE CHANGE
Potomac has not suffered any material adverse change in its business,
financial condition, results of operations or prospects since December 31, 1993.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES
Potomac has no liability (contingent or otherwise) that is material to
Potomac or that, when combined with all similar liabilities, would be material
to Potomac, except as disclosed in the Potomac Financial Statements and except
for liabilities incurred in the ordinary course of business consistent with past
practice since the date of the most recent Potomac Financial Statements.
2.7 LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS
Except as Previously Disclosed, there are no actions, suits or proceedings
instituted or pending or, to the best knowledge of Potomac's management,
threatened against Potomac or against any property, asset, interest or right of
Potomac, or against any officer, director or employee of Potomac that would, if
determined adversely to Potomac, have a material adverse effect on Potomac. To
the best knowledge of Potomac, Potomac has complied in all material respects
with all laws, ordinances, requirements, regulations or orders applicable to its
business (including environmental laws, ordinances, requirements, regulations or
orders).
2.8 TAX MATTERS
Potomac has filed all federal, state and local tax returns and reports
required to be filed, and all taxes shown by such returns to be due and payable
have been paid or are reflected as a liability in the Potomac Financial
Statements or are being contested in good faith and have been Previously
Disclosed. Except to the extent that liabilities therefor are specifically
reflected in the Potomac Financial Statements, there are no federal, state or
local tax liabilities of Potomac other than liabilities that have arisen since
December 31, 1993, all of which have been properly accrued or otherwise provided
for on the books and records of Potomac. Except as Previously Disclosed, no tax
return or report of Potomac is under examination by any taxing authority or the
subject of any administrative or judicial proceeding, and no unpaid tax
deficiency has been asserted against Potomac by any taxing authority.
2.9 PROPERTY
Potomac has good and marketable title free and clear of all material liens,
encumbrances, charges, defaults or equitable interests to all of the properties
and assets, real and personal, reflected in the balance sheet included in the
Potomac Financial Statements as of December 31, 1993 or acquired after such
date. To the best knowledge of Potomac, all buildings, and all fixtures,
equipment, and other property and assets which are material to its business,
held under leases or subleases, are held under valid instruments enforceable in
accordance with their respective terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws. To the best knowledge of Potomac,
the buildings, structures, and appurtenances owned, leased, or occupied by
Potomac are in good operating condition and in a state of good maintenance and
repair, comply with applicable zoning and other municipal laws and regulations,
and there are no latent defects therein.
2.10 EMPLOYEE BENEFIT PLANS
Potomac has previously delivered to F&M true and complete copies of all
material retirement, profit-sharing, stock option, bonus, vacation or other
material incentive plans or agreements, all material medical, dental or other
health plans, all life insurance plans and all other material employee benefit
plans or fringe benefit plans (the "Potomac Benefit Plans"). All Potomac Benefit
Plans are in compliance with the applicable terms of the Internal Revenue Code
of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to Potomac.
I-6

<PAGE>
2.11 INSURANCE
Potomac currently maintains insurance in amounts reasonably necessary for
its operations and, to the best knowledge of Potomac, similar in scope and
coverage to that maintained by other entities similarly situated. Potomac has
not received any notice of a premium increase or cancellation or a failure to
renew with respect to any insurance policy or bond and, within the last three
years, Potomac has not been refused any insurance coverage sought or applied
for, and Potomac has no reason to believe that existing insurance coverage
cannot be renewed as and when the same shall expire upon terms and conditions as
favorable as those presently in effect, other than possible increases in
premiums or unavailability of coverage that do not result from any extraordinary
loss experience on the part of Potomac.
2.12 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the balance sheets included in
the Potomac Financial Statements, as of their respective dates, is adequate in
all material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
2.13 BROKERS AND FINDERS
Neither Potomac nor any of its officers, directors or employees has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with transactions contemplated by this
Agreement, except for Baxter, Fentriss and Company.
2.14 STATEMENTS TRUE AND CORRECT
When the Registration Statement on Form S-4 (the "Registration Statement")
to be filed by F&M with the Securities and Exchange Commission (the "SEC") shall
become effective, and at all times subsequent thereto up to and including the
Potomac shareholders' meeting to vote upon the Affiliation, such Registration
Statement and all amendments or supplements thereto, with respect to all
information set forth therein furnished by Potomac relating to Potomac, (i)
shall comply in all material respects with the applicable provisions of the
federal and state securities laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF F&M
F&M represents and warrants to Potomac as follows:
3.1 ORGANIZATION, STANDING AND POWER
F&M is a corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia, with full corporate power and
authority to carry on its business as now conducted. F&M is duly registered as a
bank holding company under the Bank Holding Company Act of 1956.
3.2 ORGANIZATION, STANDING AND POWER OF F&M SUBSIDIARIES
Each subsidiary of F&M (the "F&M Subsidiaries" and, collectively with F&M,
the "F&M Companies") is a duly organized corporation, validly existing and in
good standing in their respective states of incorporation. Each F&M Subsidiary
(i) has full corporate power and authority to carry on its business as now
conducted and (ii) is duly qualified to do business in the states where its
ownership or leasing of property or the conduct of its business requires such
qualification and where the failure to so qualify would have a material adverse
effect on F&M on a consolidated basis.
3.3 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) F&M has all requisite corporate power and authority to enter into and
to perform all of its obligations under this Agreement and the Plan of Share
Exchange. The execution, adoption and delivery of this Agreement and the Plan of
Share Exchange and the consummation of the Affiliation have been duly and
validly authorized by all necessary corporate action on the part of F&M. This
Agreement and the Plan of Share Exchange represent the legal, valid, and binding
obligations of F&M, enforceable against F&M in accordance with their respective
terms, in each case subject to (a) bankruptcy, insolvency, reorganization,
moratorium, conservatorship, receivership or other similar laws affecting the
enforcement of rights of creditors of
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FDIC-insured institutions or the enforcement of creditors' rights generally, (b)
laws relating to the safety and soundness of depository institutions and their
holding companies (c) general principles of equity.
(b) Neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by F&M with any of the
provisions hereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of F&M or any F&M Subsidiary; (ii)
constitute or result in the breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon, any property or asset of F&M or any F&M
Subsidiary pursuant to any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation which would have a material adverse effect on
the business, operations or financial condition of F&M on a consolidated basis,
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to F&M or any F&M Subsidiary.
3.4 CAPITAL STRUCTURE
The authorized capital stock of F&M consists of: (i) 5,000,000 shares of
preferred stock, no par value per share, of which none are issued and
outstanding; and (ii) 20,000,000 shares of common stock, par value $2.00 per
share, of which 15,648,652 shares were issued and outstanding on September 30,
1994. All outstanding shares of F&M Common Stock have been duly issued and are
validly outstanding, fully paid and nonassessable. The shares of F&M Common
Stock to be issued in exchange for shares of Potomac Common Stock upon
consummation of the Affiliation will have been duly authorized and, when issued
in accordance with the terms of this Agreement, will be validly issued, fully
paid and nonassessable and will be duly registered under the applicable federal
and state securities laws.
3.5 FINANCIAL STATEMENTS
The F&M Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of F&M
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods then ended
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments that are not material in amount or effect) in conformity with
generally accepted accounting principles applicable to financial institutions
applied on a consistent basis. The F&M Financial Statements shall mean (i) the
consolidated balance sheets of F&M as of December 31, 1993 and 1992 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years ended December 31, 1993, 1992 and 1991 (including
related notes and schedules, if any) and (ii) the consolidated balance sheets of
F&M and related consolidated statements of income, shareholders' equity and cash
flows (including related notes and schedules, if any) with respect to periods
ended subsequent to December 31, 1993.
3.6 MATERIAL ADVERSE CHANGE
F&M has not, on a consolidated basis, suffered any material adverse change
in its business, financial condition, results of operations or prospects since
December 31, 1993.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES
Neither F&M nor any F&M Subsidiary has any liability (contingent or
otherwise) that is material to F&M on a consolidated basis or that, when
combined with all similar liabilities, would be material to F&M on a
consolidated basis, except as disclosed in the F&M Financial Statements and
except for liabilities incurred in the ordinary course of business consistent
with past practice since the date of the most recent F&M Financial Statements.
3.8 LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS
There are no actions, suits or proceedings instituted or pending or, to the
best knowledge of F&M, threatened against any of the F&M Companies or against
any property, asset, interest or right of any of the F&M Companies or against
any officer, director or employee of any of the F&M Companies that would, if
determined adversely to F&M or any F&M Subsidiary, have a material adverse
effect on F&M on a consolidated basis. To the best knowledge of F&M, the F&M
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or orders).
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3.9 TAX MATTERS
F&M has filed all federal, state and local tax returns and reports required
to be filed, and all taxes shown by such returns to be due and payable have been
paid or are reflected as a liability in the F&M Financial Statements or are
being contested in good faith and have been Previously Disclosed. Except to the
extent that liabilities therefor are specifically reflected in the F&M Financial
Statements, there are no federal, state or local tax liabilities of F&M other
than liabilities that have arisen since December 31, 1993, all of which have
been properly accrued or otherwise provided for on the books and records of F&M.
Except as Previously Disclosed, no tax return or report of F&M is under
examination by any taxing authority or the subject of any administrative or
judicial proceeding, and no unpaid tax deficiency has been asserted against F&M
by any taxing authority.
3.10 EMPLOYEE BENEFIT PLANS
(a) All F&M employee benefit plans are in compliance with the applicable
terms of ERISA and the IRC and any other applicable laws, rules and regulations,
the breach or violation of which could result in a material liability to F&M on
a consolidated basis.
(b) No F&M employee benefit plan subject to ERISA that is a defined benefit
pension plan has any "unfunded current liability," as that term is defined in
Section 302(d)(8)(A) of ERISA, and the present fair market value of the assets
of any such plan exceeds the plan's "benefit liabilities," as that term is
defined in Section 4001(a)(16) of ERISA, when determined under actuarial factors
that would apply if the plan was terminated in accordance with all applicable
legal requirements.
3.11 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the balance sheets included in
the F&M Financial Statements, as of their respective dates, is adequate in all
material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
3.12 STATEMENTS TRUE AND CORRECT
When the Registration Statement to be filed by F&M with the SEC shall
become effective, and at all times subsequent thereto up to and including the
Potomac shareholders' meeting to vote upon the Affiliation, such Registration
Statement and all amendments or supplements thereto, with respect to all
information set forth therein furnished by F&M relating to F&M (i) shall comply
in all material respects with the applicable provisions of the federal and state
securities laws, and (ii) shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements contained therein not misleading.
ARTICLE 4
COVENANTS AND AGREEMENTS
4.1 INVESTIGATION AND CONFIDENTIALITY
Potomac will keep F&M advised of all material developments relevant to its
business and to consummation of the Affiliation, and F&M will advise Potomac of
any material adverse change in its financial condition or operations and all
material developments that are likely to adversely affect consummation of the
Affiliation. While the parties have conducted their initial due diligence review
of each other, F&M and Potomac each may make or cause to be made such further
investigation of the financial and legal condition of the other as such party
reasonably deems necessary or advisable in connection with the Affiliation,
provided, however, that such investigation shall not interfere unnecessarily
with normal operations. F&M and Potomac agree to furnish the other and the
other's advisors with such financial data and other information with respect to
its business and properties as such other party shall from time to time
reasonably request. Each party hereto shall, and shall cause each of its
directors, officers, attorneys and advisors to, maintain the confidentiality of
all information obtained in such investigation which is not otherwise publicly
disclosed by the other party, such undertaking with respect to confidentiality
to survive any termination of this Agreement. In the event of the termination of
this Agreement, each party shall return to the furnishing party or, at the
request of the furnishing party, destroy and certify the destruction of all
confidential information previously furnished in connection with the
transactions contemplated by this Agreement.
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4.2 REGISTRATION STATEMENT; SHAREHOLDER APPROVAL
(a) Potomac shall submit this Agreement and the Plan of Share Exchange to
its shareholders for approval at an annual or special meeting to be held on or
before April 15, 1995 or as soon thereafter as practicable (the "Potomac
Meeting"). Subject to the fiduciary duties of the Board of Directors of Potomac
(as advised in writing by its counsel), the Potomac Board of Directors shall
unanimously recommend approval of the Affiliation and shall use its best efforts
to solicit and obtain votes of the holders of Potomac Common Stock in favor of
the Affiliation. Each member of the Potomac Board of Directors agrees to vote
all shares of Potomac Common Stock under his control (and not held in a
fiduciary capacity) in favor of the Affiliation.
(b) F&M and Potomac will prepare jointly the proxy statement/prospectus to
be used in connection with the Potomac Meeting (the "Proxy
Statement/Prospectus"). F&M will prepare and file with the SEC the Registration
Statement, of which such Proxy Statement/Prospectus shall be a part, and will
use its best efforts to have the Registration Statement declared effective as
promptly as possible. When the Registration Statement or any post-effective
amendment or supplement thereto shall become effective and at all times
subsequent to such effectiveness, up to and including the date of the Potomac
Meeting, such Registration Statement and all amendments or supplements thereto,
with respect to all information set forth therein furnished or to be furnished
by Potomac relating to Potomac and by F&M relating to the F&M Companies, will
conform in all material respects with the provisions of the Securities Act of
1933 and any other applicable statutory or regulatory requirements.
4.3 OPERATION OF THE BUSINESS OF POTOMAC
Between the date of this Agreement and the Effective Date, Potomac agrees
that it will operate its business substantially as presently operated and only
in the ordinary course, and it will use its best efforts to preserve its
properties, business and relationships with customers, employees and other
persons having business dealings with it. Without limiting the generality of the
foregoing, Potomac agrees that it will not, without the prior written consent of
F&M:
(a) Make any change in its authorized capital stock, or issue or sell any
additional shares of, securities convertible into or exchangeable for, or
options, warrants or rights to purchase, its capital stock, nor shall it
purchase, redeem or otherwise acquire any of its outstanding shares of capital
stock, except that Potomac shall not be restricted from acquiring any shares of
Potomac Common Stock that secure an extension of credit made by Potomac that is
in default or selling, in the ordinary course, any such re-acquired shares;
(b) Make any changes in the composition, level of compensation or title of
its officers, directors or other key management personnel other than permitted
by current employment policies in the ordinary course of business, any of which
changes shall be reported promptly to F&M;
(c) Enter into any bonus, incentive compensation, stock option, deferred
compensation, profit sharing, thrift, retirement, pension, group insurance or
other benefit plan or any employment or consulting agreement;
(d) Incur any obligation or liability (whether absolute or contingent,
excluding suits instituted against it), make any pledge, or encumber any of its
assets, nor dispose of any of its assets in any other manner, except in the
ordinary course of its business and for adequate value, or as otherwise
specifically permitted in this Agreement;
(e) Solicit or encourage inquiries or proposals with respect to, furnish
any information relating to, or participate in any negotiations or discussions
concerning, any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, Potomac or any business
combination with Potomac other than as contemplated by this Agreement; (except
where the failure to furnish such information or participate in such
negotiations or discussions would, on the advice of counsel, constitute a breach
of the fiduciary or legal obligations of Potomac's Board of Directors to its
shareholders); or authorize or permit any officer, director, agent or affiliate
of Potomac to do any of the above; or fail to notify F&M immediately if any such
inquiries or proposals are received by Potomac;
(f) Change its lending, investment, asset/liability management or other
material banking policies in any material respect, except as may be required by
applicable law;
(g) Alter, amend or repeal its Bylaws or Articles of Incorporation; or
(h) Propose or take any other action which would make any representation or
warranty in Article 2 hereof untrue.
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4.4 DIVIDENDS
F&M agrees that prior to the Effective Date Potomac may declare and pay its
regular annual cash dividend in 1995 in an amount not to exceed in the aggregate
$0.15 per share. Notwithstanding the foregoing, the payment of each such
dividend shall be subject to the reasonable determination of F&M that no
material change has occurred in the financial condition or results of operation
of Potomac since December 31, 1993.
4.5 REGULATORY FILINGS
F&M and Potomac shall use their best efforts to prepare and file as soon as
practicable after the date hereof all required applications for regulatory
approval of the Affiliation. F&M shall use its best efforts to obtain prompt
approval of each required application.
4.6 PUBLIC ANNOUNCEMENTS
Each party will consult with the other before issuing any press release or
otherwise making any public statements with respect to the Affiliation and shall
not issue any such press release or make any such public statement prior to such
consultations, except as may be required by law.
4.7 ACCOUNTING TREATMENT
F&M and Potomac shall each use their best efforts to ensure that the
Affiliation qualifies for pooling-of-interests accounting treatment.
4.8 AFFILIATES
Potomac shall identify those persons who may deemed to be "affiliates" of
Potomac with the meaning of Rule 145 promulgated under the Securities Act.
Potomac shall cause each person so identified to deliver to F&M at least 30 days
prior to the Effective Date a written agreement providing that such person will
not dispose of F&M Common Stock received in the Affiliation, except in a manner
that (i) complies with the Securities Act of 1933 and the rules and regulations
promulgated thereunder, and (ii) is consistent with the qualification of the
transactions contemplated hereby for pooling of interests accounting treatment.
4.9 BENEFIT PLANS
Upon consummation of the Affiliation, as soon as administratively
practicable, employees of Potomac shall be entitled to participate in the F&M
pension, severance, benefit and similar plans on the same terms and conditions
as employees of the F&M Companies, giving effect to years of service with
Potomac as if such service were with F&M.
4.10 INDEMNIFICATION
F&M agrees that following the Effective Date, it shall indemnify, defend
and hold harmless any person who has rights to indemnification from Potomac, to
the same extent and on the same conditions as such person is entitled to
indemnification pursuant to Virginia law and Potomac's Articles of Incorporation
or Bylaws, as in effect on the date of this Agreement, to the extent legally
permitted to do so, with respect to matters occurring on or prior to the
Effective Date. Without limiting the foregoing, in any case in which corporate
approval may be required to effectuate any indemnification, F&M shall direct, at
the election of the party to be indemnified, that the determination of
permissibility of indemnification shall be made by independent counsel mutually
agreed upon between F&M and the indemnified party. F&M shall use its reasonable
best efforts to maintain Potomac's existing directors' and officers' liability
policy, or some other policy, including F&M's existing policy, providing at
least comparable coverage, covering persons who are currently covered by such
insurance of Potomac for a period of three years after the Effective Date on
terms no less favorable than those in effect on the date hereof.
4.11 POTOMAC STOCK OPTIONS
At the Effective Date, by virtue of the Share Exchange and without any
action on the part of the holders thereof, each stock option issued by Potomac
pursuant to the 1994 Directors' Stock Option Plan and the Bank of the Potomac
Incentive Stock Option Plan issued and outstanding immediately prior to the
Effective Date shall cease to be outstanding and shall be converted into and
exchanged for shares of F&M Common Stock pursuant to the terms and conditions
set forth in the Plan of Share Exchange.
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ARTICLE 5
CONDITIONS TO THE AFFILIATION
5.1 GENERAL CONDITIONS
The respective obligations of each of F&M and Potomac to effect the
Affiliation shall be subject to the fulfillment or waiver at or prior to the
Effective Date of the following conditions:
(a) CORPORATE ACTION. All corporation action necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby shall have been duly and validly taken,
including without limitation the approval of the shareholders of Potomac.
(b) REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective and shall not be subject to a stop order or any threatened
stop order of the SEC or any state securities commissioner.
(c) REGULATORY APPROVALS. F&M and Potomac shall have received all
regulatory approvals required in connection with the transactions contemplated
by this Agreement, all notice periods and waiting periods required after the
granting of any such approvals shall have passed, and all such approvals shall
be in effect; provided, however, that no such approvals shall have imposed any
condition or requirement which, in the reasonable opinion of the Boards of
Directors of F&M or Potomac, would so materially adversely impact the economic
or business benefits of the transactions contemplated by this Agreement as to
render consummation of the Affiliation inadvisable or unduly burdensome.
(d) TAX OPINION. F&M and Potomac shall have received an opinion of F&M's
counsel in form and substance satisfactory to F&M and Potomac to the effect
that the Affiliation will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code and that no gain or loss will be
recognized by the shareholders of Potomac to the extent they receive F&M
Common Stock solely in exchange for their Potomac Common Stock in the
Affiliation.
(e) OPINIONS OF COUNSEL. Potomac shall have delivered to F&M and F&M shall
have delivered to Potomac opinions of counsel, dated as of the Effective Date,
as to such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) LEGAL PROCEEDINGS. Neither F&M nor Potomac shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Affiliation.
5.2 CONDITIONS TO OBLIGATIONS OF F&M
The obligations of F&M to effect the Affiliation shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Potomac set forth in Article 2 shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Date as though
made on the Effective Date (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date),
except as otherwise expressly contemplated by this Agreement or consented to in
writing by F&M.
(b) PERFORMANCE OF OBLIGATIONS. Potomac shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date.
(c) OFFICERS' CERTIFICATE. Potomac shall have delivered to F&M a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.2(a) and
5.2(b) have been satisfied.
(d) AFFILIATE LETTERS. F&M shall have received the written agreements from
the affiliates as specified in Section 4.8 hereof.
(e) ACCOUNTANTS' LETTERS. F&M shall have received a letter, dated as of the
Effective Date, from Yount, Hyde & Barbour, P.C., satisfactory in form and
substance to F&M, that the Affiliation will qualify for pooling-of-interests
accounting treatment.
5.3 CONDITIONS TO OBLIGATIONS OF POTOMAC
The obligations of Potomac to effect the Affiliation shall be subject to
the fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
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(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
F&M set forth in Article 3 shall be true and correct in all material respects as
of the date of this Agreement and as of the Effective Date as though made on the
Effective Date (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date), except as otherwise
expressly contemplated by this Agreement or consented to in writing by Potomac.
(b) PERFORMANCE OF OBLIGATIONS. F&M shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) OFFICERS' CERTIFICATE. F&M shall have delivered to Potomac a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.1(b), 5.1(c),
5.3(a) and 5.3(b) have been satisfied.
(d) INVESTMENT BANKING LETTER. Potomac shall have received an updated
fairness opinion from Baxter Fentriss and Company, financial advisor to Potomac,
addressed to Potomac and dated on or about the date the Proxy
Statement/Prospectus is mailed to shareholders of Potomac, to the effect that
the terms of the Affiliation are fair to the shareholders of Potomac from a
financial standpoint.
ARTICLE 6
TERMINATION
6.1 TERMINATION
This Agreement and the Plan of Share Exchange may be terminated at any time
before the Effective Date, whether before or after approval thereof by the
shareholders of Potomac, as provided below:
(a) MUTUAL CONSENT. By mutual consent of the parties, evidenced by their
written agreement.
(b) CLOSING DELAY. At the election of either party, evidenced by written
notice, if the Closing shall not have occurred on or before August 31, 1995, or
such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 6.1(b) shall
not be available to either party whose failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the Closing
to occur on or before such date.
(c) CONDITIONS TO F&M PERFORMANCE NOT MET. By F&M upon delivery of written
notice of termination to Potomac if any event occurs which renders impossible
the satisfaction in any material respect of one or more of the conditions to the
obligations of F&M to effect the Affiliation set forth in Sections 5.1 and 5.2,
and such noncompliance is not waived by F&M.
(d) CONDITIONS TO POTOMAC PERFORMANCE NOT MET. By Potomac upon delivery of
written notice of termination to F&M if any event occurs which renders
impossible the satisfaction in any material respect of one or more of the
conditions to the obligations of Potomac to effect the Affiliation set forth in
Sections 5.1 and 5.3, and such noncompliance is not waived by Potomac.
6.2 EFFECT OF TERMINATION
In the event this Agreement is terminated pursuant to Section 6.1 hereof,
both this Agreement and the Plan of Share Exchange shall become void and have no
effect, except that (i) the provisions hereof relating to confidentiality, press
releases and expenses set forth in Sections 4.1,4.6 and 6.4, respectively, shall
survive any such termination and (ii) a termination pursuant to 6.1(c) or 6.1(d)
hereof shall not relieve the breaching party from liability for an uncured
intentional breach of any provision of this Agreement giving rise to such
termination.
6.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement and the
Plan of Share Exchange shall not survive the Effective Date and shall be
terminated and extinguished at the Effective Date. From and after the Effective
Date, the parties hereto shall have no liability to the other on account of any
breach of any of those representations, warranties and covenants; provided,
however, that the foregoing clause shall not (i) apply to agreements of the
parties which by their terms are intended to be performed after the Effective
date, and (ii) shall not relieve any person for liability for fraud, deception
or intentional misrepresentation.
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6.4 EXPENSES
(a) Except as provided below, each of the parties shall bear and pay all
costs and expenses incurred by it in connection with the transactions
contemplated herein, including fees and expenses of its own financial
consultants, accountants and counsel, except that F&M agrees to bear and pay the
cost of printing and mailing the Proxy Statement/Prospectus.
(b) Notwithstanding the provisions of Section 6.4(a) hereof, if for any
reason the Affiliation is not approved by Potomac's shareholders at the Potomac
Meeting or any adjournment thereof, Potomac shall reimburse F&M for one-half of
all reasonable out-of-pocket expenses incurred by F&M in connection with the
transactions contemplated by this Agreement, provided that the maximum amount
that Potomac shall be responsible to F&M for under this Section 6.4(b) shall be
limited to $50,000.
(c) If this Agreement is terminated by F&M or Potomac because of a willful
and material breach by the other of any representation, warranty, covenant,
undertaking or restriction set forth herein, and provided that the terminating
party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall reimburse the other party of all
reasonable out-of-pocket expenses incurred by it in connection with the
transactions contemplated by this Agreement.
(d) Final settlement with respect to the reimbursement of such fees and
expenses by the parties shall be made within thirty days after the termination
of this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 ENTIRE AGREEMENT
This Agreement contains the entire agreement among F&M and Potomac with
respect to the Affiliation and the related transactions and supersedes all prior
arrangements or understandings with respect thereto.
7.2 BINDING EFFECT; NO THIRD PARTY RIGHTS
This Agreement shall bind F&M and Potomac and their respective successors
and assigns. Other than Section 4.10, nothing in this Agreement is intended to
confer upon any person, other than the parties hereto or their respective
successors, any rights or remedies under or by reason of this Agreement.
7.3 WAIVER AND AMENDMENT
Any term or provision of this Agreement may be waived in writing at any
time by the party which is, or whose shareholders are, entitled to the benefits
thereof, and this Agreement may be amended or supplemented by written
instructions duly executed by the parties hereto at any time, whether before or
after the Annual Meeting, except statutory requirements and requisite approvals
of shareholders and regulatory authorities.
7.4 GOVERNING LAW
Except as required otherwise or otherwise indicated herein, this Agreement
shall be construed and enforced according to the laws of the Commonwealth of
Virginia.
7.5 NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
registered or certified mail, postage prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
38 Rouss Avenue
P. 0. Box 2800
Winchester, Virginia 22604
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Copy to:
George P. Whitley
LeClair, Ryan, Joynes, Epps & Framme
707 East Main Street; 11th Floor
Richmond, Virginia 23219
If to Potomac:
Thom F. Hanes
Bank of the Potomac
230 Herndon Parkway
P.O. Box 1000
Herndon, Virginia 22070
Copy to:
David A. Lawrence
Odin, Feldman & Pittleman
9302 Lee Highway, 11th Floor
Fairfax, Virginia 22031
7.6 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts together shall constitute one and
the same agreement.
7.7 SEVERABILITY
In the event that any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provisions hereof. Any provision of
this Agreement held invalid or unenforceable only in part or degree shall remain
in full force and effect to the extent not held invalid or unenforceable.
Further, the parties agree that a court of competent jurisdiction may reform any
provision of this Agreement held invalid or unenforceable so as to reflect the
intended agreement of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
Winchester, Virginia
By: /s/ Jack R. Huyett
Jack R. Huyett
President and Chief
Administrative Officer
ATTEST:
/s/ Alfred B. Whitt
Alfred B. Whitt
Secretary
BANK OF THE POTOMAC, INC.
Herndon, Virginia
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By: /s/ Thom F. Hanes
Thom F. Hanes
President
ATTEST:
/s/ Mason L. Kimble
Mason L. Kimble
Cashier
BANK OF THE POTOMAC
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of Bank of the
Potomac agrees to be bound by his personal obligations as provided in Section
4.2 and 4.3(e) of the Agreement and Plan of Reorganization.
<TABLE>
<S> <C> <C>
/s/ Daniel R. Baker /s/ Norman P. Horn
Daniel R. Baker Norman P. Horn
/s/ David F. Feldman /s/ Henry C. Mackall
David F. Feldman Henry C. Mackall
/s/ Howard R. Green /s/ Thomas D. Rust
Howard R. Green Thomas D. Rust
/s/ Thom F. Hanes /s/ Robert E. Sevila
Thom F. Hanes Robert E. Sevila
</TABLE>

EXHIBIT A
To the Agreement and
Plan of
Reorganization
PLAN OF SHARE EXCHANGE
BETWEEN
BANK OF THE POTOMAC, INC.
AND
F&M NATIONAL CORPORATION
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"), Bank
of the Potomac, Inc., a Virginia banking corporation ("Potomac"), shall become
a wholly-owned subsidiary of F&M National Corporation, a Virginia corporation
and registered financial institution holding company ("F&M"), pursuant to a
statutory share exchange under Section 13.1-717 of the Virginia Stock
Corporation Act.
ARTICLE I
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TERMS OF THE SHARE EXCHANGE
1.1 THE SHARE EXCHANGE
Subject to the terms and conditions of the Agreement and Plan of
Reorganization between F&M and Potomac (the "Agreement"), at the Effective Date,
Potomac shall become a wholly-owned subsidiary of F&M through the exchange of
each outstanding share of common stock of Potomac for shares of the common stock
of F&M in accordance with Section 2.1 of this Plan of Share Exchange and
pursuant to a statutory share exchange under Section 13.1-717 of the Virginia
Stock Corporation Act (the "Share Exchange"). At the Effective Date, the Share
Exchange shall have the effect as provided in Section 13.1-721 of the Virginia
Stock Corporation Act.
1.2 ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation and Bylaws of F&M and Potomac in effect
immediately prior to the consummation of the Share Exchange shall remain in
effect following the Effective Date until otherwise amended or repealed.
ARTICLE II
MANNER OF CONVERTING SHARES
2.1 CONVERSION OF SHARES
Upon and by reason of the Share Exchange becoming effective pursuant to the
issuance of a Certificate of Share Exchange by the Virginia State Corporation
Commission, no cash, except as set forth in Section 2.3 below, shall be
allocated to the shareholders of Potomac and stock shall be issued and allocated
as follows:
(a) Each share of common stock, par value $10.00 per share, of Potomac
("Potomac Common Stock") issued and outstanding immediately prior to the
Effective Date shall, by operation of law, be automatically exchanged for the
number of shares of F&M Common Stock whose aggregate market value equals 1.75
times the book value per share of Potomac Common Stock as reported by Potomac
for the month end immediately preceding the Effective Date, plus cash for
fractional shares . The market value of F&M Common Stock will be the average of
its closing prices as reported on The National Association of Securities Dealers
Automated Quotation System, National Market System (the "NASDAQ/NMS") or the New
York Stock Exchange (the "NYSE"), as the case may be, for trades reported during
the ten trading days immediately preceding the Effective Date (the "Average
Closing Price"). The ratio of shares of F&M Common Stock that will be exchanged
for each outstanding share of Potomac Common Stock shall be referred to herein
as the "Exchange Ratio." Each holder of a certificate representing any shares of
Potomac Common Stock upon the surrender of his Potomac stock certificates to
F&M, duly endorsed for transfer in accordance with Section 2.2 below, will be
entitled to receive in exchange therefor a certificate or certificates
representing the number of shares of F&M Common Stock that his shares shall be
converted into pursuant to the Exchange Ratio. Each such holder of Potomac
Common Stock shall have the right to receive any dividends previously declared
but unpaid as to such stock and the consideration described in Sections 2.1 and
2.3 upon the surrender of such certificate in accordance with Section 2.2. In
the event F&M changes the number of shares of F&M Common Stock issued and
outstanding prior to the Effective Date as a result of any stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding F&M Common Stock and the record date therefor shall be prior to the
Effective Date, the Exchange Ratio shall be proportionately adjusted.
(b) Shares of Potomac Common Stock issued and outstanding shall, by virtue
of the Share Exchange, continue to be issued and outstanding shares held by F&M.
(c) Each stock option issued by Potomac pursuant to the 1994 Directors'
Stock Option Plan and the Bank of the Potomac Incentive Stock Option Plan (the
"Potomac Stock Options") issued and outstanding immediately prior to the
Effective Date shall cease to be outstanding and shall be converted into and
exchanged for the number of shares of F&M Common Stock whose aggregate market
value (as such market value is determined pursuant to Section 2.1(a) above) is
equal to the excess of (i) the product of the Exchange Ratio and the Average
Closing Price over (ii) the exercise price of such Potomac Stock Option, plus
cash for fractional shares. Each Potomac Stock Option outstanding at the
Effective Date shall be exchanged for F&M Common Stock and cash for fractional
shares in accordance with the procedures set forth in Section 2.2 below, and all
references to certificates of Potomac Common Stock in Section 2.2 and 2.4 shall,
for purposes of exchanging the Potomac Stock Options, be construed to mean the
form of agreement by which such Potomac Stock Option was granted.
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<PAGE>
2.2 MANNER OF EXCHANGE
As promptly as practicable after the Effective Date, F&M shall cause F&M
Bank-Winchester, acting as the exchange agent ("Exchange Agent") to send to each
former stockholder of record of Potomac immediately prior to the Effective Date
transmittal materials for use in exchanging such stockholder's certificates of
Potomac Common Stock (other than shares held by stockholders who perfect their
dissenters' rights as provided under Section 2.5 hereof) for the consideration
set forth in Section 2.1 above and Section 2.3 below. Any fractional share
checks which a Potomac shareholder shall be entitled to receive in exchange for
such stockholder's shares of Potomac Common Stock, and any dividends paid on any
shares of F&M Common Stock, that such stockholder shall be entitled to receive
prior to the delivery to the Exchange Agent of such stockholder's certificates
representing all of such stockholder's shares of Potomac Common Stock will be
delivered to such stockholder only upon delivery to the Exchange Agent of the
certificates representing all of such shares (or indemnity satisfactory to F&M
and the Exchange Agent, in their judgment, if any of such certificates are lost,
stolen or destroyed). No interest will be paid on any such fractional share
checks or dividends to which the holder of such shares shall be entitled to
receive upon such delivery.
2.3 NO FRACTIONAL SHARES
No certificates or scrip for fractional shares of F&M Common Stock will be
issued. In lieu thereof, F&M will pay the value of such fractional shares in
cash on the basis of the average of the closing prices of F&M Common Stock as
reported on the NASDAQ/NMS or on the NYSE, as the case may be, for trades
reported during the ten trading days immediately preceding the Effective Date.
2.4 DIVIDENDS
No dividend or other distribution payable to the holders of record of F&M
Common Stock at or as of any time after the Effective Date shall be paid to the
holder of any certificate representing shares of Potomac Common Stock issued and
outstanding at the Effective Date until such holder physically surrenders such
certificate for exchange as provided in Section 2.2 of this Plan of Share
Exchange, promptly after which time all such dividends or distributions shall be
paid (without interest).
2.5 RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of Potomac who object to the Share Exchange will be entitled
to the rights and remedies set forth in sections 13.1-729 through 13.1-741 of
the Virginia Stock Corporation Act.
ARTICLE III
TERMINATION
This Plan of Share Exchange may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 6 of the Agreement
between the parties.
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<PAGE>
APPENDIX II
[BAXTER FENTRISS AND COMPANY LETTERHEAD]
January , 1995
The Board of Directors
Bank of the Potomac
230 Herndon Parkway
Herndon, Virginia 22070
Dear Members of the Board:
Bank of the Potomac, Inc., Herndon, Virginia ("Potomac") and F&M National
Corporation, Winchester, Virginia ("F&M") have entered into an agreement for the
acquisition of Potomac by F&M ("Acquisition"). The terms of the Acquisition are
set forth in the Agreement and Plan of Reorganization, dated as of November 18,
1994 ("Agreement").
The terms of the Acquisition provide that, with the possible exception of
those shares as to which dissenter's rights may be perfected, each common share
of Potomac ($10.00 par value) will be converted into the number of shares of F&M
common stock ($2.00 par value) whose aggregate market value equals 1.75 times
the book value per share of Potomac common stock subject to certain adjustments.
You have asked our opinion as to whether the terms of the proposed
transaction pursuant to the Agreement are fair to the respective shareholders of
Potomac from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of Potomac and F&M which were available to us from published sources.
In addition, we have, among other things: (a) to the extent deemed relevant,
analyzed selected public information of certain other financial institutions and
compared Potomac and F&M from a financial point of view to other financial
institutions; (b) reviewed the historical, and potential market for the common
stock of Potomac; (c) compared the terms of the Acquisition with the terms of
certain other comparable transactions to the extent information concerning such
acquisitions was publicly available; (d) reviewed the Agreement and related
documents; and (e) made such other analyses and examinations as we deemed
necessary. We have also met with various senior officers of Potomac and F&M to
discuss the foregoing as well as other matters we believe relevant to our
opinion.
We have not conducted a review of the registration statements, proxy
materials, regulatory applications or other documents which must be prepared
prior to completion of any transaction.
We have not independently verified the financial and other information
concerning Potomac or F&M or other data which we have considered in our review.
We have assumed the accuracy and completeness of all such information; however,
we have no reason to believe that such information is not accurate and complete.
Our conclusion is rendered on the basis of securities market conditions
prevailing as of the date hereof and on the conditions and prospects, financial
and otherwise, of Potomac and F&M as they exist and are known to us as of
September 30, 1004.
We have acted as financial advisor to Potomac in connection with the
Acquisition and will receive from Potomac a fee for our services, a significant
portion of which is contingent upon the consummation of the Acquisition.
It is understood that this opinion may be included in its entirety in any
communication by Potomac or the Board of Directors to the stockholders of
Potomac. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we
are of the opinion that the terms of the Acquisition are fair to the
shareholders of Potomac from a financial point of view.
Very truly yours,
Baxter Fentriss and Company
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<PAGE>
APPENDIX III
ARTICLE 15.
DISSENTERS' RIGHTS
(SECTION MARK)13.1-729. DEFINITIONS. -- In this article:
"CORPORATION" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"DISSENTER" means a shareholder who is entitled to dissent from corporate
action under (section mark)13.1-730 and who exercises that right when and in
the manner required by (section mark)13.1-732 through (section mark)13.1-739.
"FAIR VALUE," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"INTEREST" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"RECORD SHAREHOLDER," means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"BENEFICIAL SHAREHOLDER" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"SHAREHOLDER" means the record shareholder or the beneficial shareholder.
(SECTION MARK)13.1-730. RIGHT TO DISSENT. -- A. A shareholder is entitled
to dissent from, and obtain payment of the fair value of his shares in the event
of, any of the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
(section mark)13.1-718 or the articles of incorporation and the shareholder
is entitled to vote on the merger or (ii) if the corporation is a
subsidiary that is merged with its parent under (section mark)13.1-719;
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or (ii) held by at least 2,000 record
shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such
shares provide otherwise;
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2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share
exchange to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving
or acquiring corporation or limited liability company or (ii) of any
other corporation or limited liability company which, at the record
date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share
exchange is to be acted on, were either listed subject to notice of
issuance on a national securities exchange or held of record by at
least 2,000 record shareholders or members; or
c. A combination of cash and shares or membership interests as
set forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and
is not approved by a majority of "disinterested directors" as such terms
are defined in (section mark)13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
(SECTION MARK)13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- A. A
record shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
(SECTION MARK)13.1-732. NOTICE OF DISSENTERS' RIGHTS. -- A. If proposed
corporate action creating dissenters' rights under (section mark)13.1-730 is
submitted to a vote at a shareholders' meeting, the meeting notice shall state
that shareholders are or may be entitled to assert dissenters' rights under this
article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under
(section mark)13.1-730 is taken without a vote of shareholders, the corporation,
during the ten-day period after the effectuation of such corporate action, shall
notify in writing all record shareholders entitled to assert dissenters' rights
that the action was taken and send them the dissenters' notice described in
(section mark)13.1-734.
(SECTION MARK)13.1-733. NOTICE OF INTENT TO DEMAND PAYMENT. -- A. If
proposed corporate action creating dissenters' rights under
(section mark)13.1-730 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (i) shall deliver to the
corporation before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated and (ii) shall not
vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
(SECTION MARK)13.1-734. DISSENTERS' NOTICE. -- A. If proposed corporate
action creating dissenters' rights under (section mark)13.1-730 is authorized at
a shareholders' meeting, the corporation, during the ten-day period after the
effectuation of such corporate action, shall deliver a dissenters' notice in
writing to all shareholders who satisfied the requirements of
(section mark)13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
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2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before or after that date;
4. Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
(SECTION MARK)13.1-735. DUTY TO DEMAND PAYMENT. -- A. A shareholder sent a
dissenters' notice described in (section mark)13.1-734 shall demand payment,
certify that he acquired beneficial ownership of the shares before or after the
date required to be set forth in the dissenters' notice pursuant to paragraph 3
of subsection B of (section mark)13.1-734, and, in the case of certificated
shares, deposit his certificates in accordance with the terms of the notice.
B. The shareholder who deposits his share pursuant to subsection A of this
section retains all other rights of the shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(SECTION MARK)13.1-736. SHARE RESTRICTIONS. -- A. The corporation may
restrict the transfer of uncertificated shares from the date the demand for
their payment is received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
(SECTION MARK)13.1-737. PAYMENT. -- A. Except as provided in
(section mark)13.1-738, within thirty days after receipt of a payment demand
made pursuant to (section mark)13.1-735, the corporation shall pay the dissenter
the amount the corporation estimates to be the fair value of his shares, plus
accrued interest. The obligation of the corporation under this paragraph may be
enforced (i) by the circuit court in the city or county where the corporation's
principal office is located, or, if none in this Commonwealth, where its
registered office is located or (ii) at the election of any dissenter residing
or having its principal office in the Commonwealth, by the circuit court in the
city or county where the dissenter resides or has its principal office. The
court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the
corporate action creating dissenters' rights, an income statement for
that year, a statement of changes in shareholders' equity for that year,
and the latest available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
(section mark)13.1-739; and
4. A copy of this article.
(SECTION MARK)13.1-738. AFTER-ACQUIRED SHARES. -- A. A corporation may
elect to withhold payment required by (section mark)13.1-737 from a dissenter
unless he was the beneficial owner of the shares on the date of the first
publication by news media or the first announcement to shareholders generally,
whichever is earlier, of the terms of the proposed corporate action, as set
forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount of each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under (section mark)13.1-739.
(SECTION MARK)13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT
OR OFFER. -- A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
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<PAGE>
demand payment of his estimate (less any payment under (section mark)13.1-737),
or reject the corporation's offer under (section mark)13.1-738 and demand
payment of the fair value of his shares and interest due, if the dissenter
believes that the amount paid under (section mark)13.1-737 or offered under
(section mark)13.1-738 is less than the fair value of his shares or that the
interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
(SECTION MARK)13.1-740. COURT ACTION. -- A. If a demand for payment under
(section mark)13.1-739 remains unsettled, the corporation shall commence a
proceeding within sixty days after receiving the payment demand and petition the
circuit court in the city or county described in subsection B of this section to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth were the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provision of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the value, plus accrued interest, of his after-acquired shares for which the
corporation elected to withhold payment under (section mark)13.1-738.
(SECTION MARK)13.1-741. COURT COSTS AND COUNSEL FEES. -- A. The court in an
appraisal proceeding commenced under (section mark)13.1-740 shall determine all
costs of the proceeding, including the reasonable compensation and expense of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under
(section mark)13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of (section mark)13.1-732 through (section mark)13.1-739; or
2. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed did not act in good faith with respect to the right
provided by this article.
C. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of (section mark)13.1-737
the court shall assess the costs against the corporation, except that the court
may assess costs against all or some of the dissenters who are parties to the
proceedings, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
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PART II--INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS

As permitted by the Virginia Stock Corporation Law, Article VII, of
the Registrant's Articles of Incorporation provides:

Each director and officer shall be indemnified by the corporation against
liabilities, fines, penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been such director
or officer, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection therewith.
Except in relation to matters as to which he shall have been finally adjudged
to be liable by reason of having been guilty of gross negligence or willful
misconduct in the performance of his duties as such director or officers. In
the event of any other judgment against such director or officer or in the
event of a settlement, the indemnification shall be made only if the
corporation shall be advised, in case none of the persons involved shall be or
has been a director of the corporation, by the Board of Directors, and
otherwise by independent counsel to be appointed by the Board of Directors,
that in its or his opinion such director or officer was not guilty of gross
negligence or willful misconduct in the performance of his duties and, in the
event of a settlement, that such settlement was, or if still to be made is, in
the best interests of the corporation. If the determination is to be made by
the Board of Directors, it may rely, as to all questions of law, on the advice
of independent counsel. Every reference herein to director or officer shall
include every director or officer or former director or officer of the
corporation and every person who may have served at its request as a director
or officer of another corporation in which the corporation owns shares of
stock or of which it is a creditor or, in case of a non-stock corporation, to
which the corporation contributes and, in all of such cases, his executors and
administrators. The right of indemnification hereby provided shall not be
exclusive of any other rights to which any director or officer may be
entitled. The aforesaid indemnification shall also apply to an employee or
agent of the corporation.

Section 13.1-698 of the Virginia Stock Corporation Act (the "Act")
provides:

Unless limited by its Articles of Incorporation, a corporation shall indemnify a
director who entirely prevails in the defense of any proceeding to which he is a
party because he is or was a director of the corporation against reasonable
expenses incurred by him in connection with the proceeding.

Section 13.1.702 of the Act extends such rights to indemnification to officers
of the corporation.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) Exhibits Index

Exhibit No. Description of Exhibit
1 Not Applicable
2.1 Agreement and Plan of Reorganization, dated November 18,
1994, between F&M National Corporation and Bank of the
Potomac, Inc. and a related Plan of Share Exchange, filed
as Appendix I to the Proxy Statement/Prospectus included
in this Registration Statement.
3.1 Articles of Incorporation of F&M. Incorporated herein by
reference to Exhibit 3.1 to F&M's Registration Statement
on Form S-4 (Registration No. 33-45717).
3.2 Bylaws of F&M. Incorporated herein by reference to F&M's
Registration Statement on Form S-4 (Registration No.
33-45717).
5 Opinion of LeClair, Ryan, Joynes, Epps & Framme, P.C.,
regarding the legality of the securities being registered
and consent. (Previously filed.)
8.1 Form of tax opinion of LeClair, Ryan, Joynes, Epps &
Framme, P.C., regarding the Share Exchange between
Potomac and F&M. (Previously filed.)
23.1 Consent of Yount, Hyde & Barbour, P.C., as accountants
for F&M.
23.2 Consent of Thompson, Greenspon & Co., P.C., as accountants
for Potomac.
23.3 Consent of LeClair, Ryan, Joynes, Epps & Framme, P.C.,
(included as part of Exhibit 5). (Previously filed.)
23.4 Consent of Odin, Feldman & Pittlement, P.C., as counsel
to Potomac. (Previously filed.)
23.5 Consent of Baxter Fentriss and Company relating to inclusion
of its opinion given to Potomac in the Proxy
Statement. Prospectus included in this Registration
Statement.(Previously filed.)
99.1 The manually signed report, dated January 28, 1994, of
Yount, Hyde & Barbour, P.C. as accountants for F&M
will be kept on file in the offices of F&M.
99.2 The manually signed report, dated January 14, 1994,
of Thompson, Greenspon & Co., P.C. as accountants for
Potomac will be kept on file in the offices of F&M.
99.3 Form of proxy of Bank of the Potomac. (Previously filed.)

(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.

ITEM 22. UNDERTAKINGS

(a) Item 512 of Regulation S-K.

RULE 415 OFFERINGS. The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE. The
undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

REGISTRATION ON FORM S-4. (1) The undersigned registrant hereby undertakes
as follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party which is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other Items of the applicable form.

(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of
the Act and is used in connection with an offering of securities subject
to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

REQUEST FOR ACCELERATION OF EFFECTIVE DATE OR FILING REGISTRATION
STATEMENT ON FORM S-8. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors,
officers, and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payments by the registrant
of expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

(b) Item 22(b) of Form S-4

The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.

The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.

SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
signed this amendment no. 1 registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Winchester,
Commonwealth of Virginia, on February 10, 1995.

F & M NATIONAL CORPORATION
Winchester, Virginia

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

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on February 10, 1995.

NAME TITLE

/s/ W. M. Feltner Chief Executive Officer
W. M. Feltner and Chairman of the Board
Principal Executive Officer
and Director

/s/ Alfred B. Whitt Principal Financial Officer,
Alfred B. Whitt Secretary, Senior Vice
President and Director

/s/ Jack R. Huyett President, Chief Administrative
Jack R. Huyett Officer and Director

/s/ Frank Armstrong, III Director
Frank Armstrong, III

/s/ Harlan M. Bell Director
Harlan M. Bell

/s/ James L. Bowman Director
James L. Bowman

/s/ Betty H. Carroll Director
Betty H. Carroll

/s/ William H. Clement Director
William H. Clement

/s/ William R. Harris Director
William R. Harris

/s/ L. David Horner, III Director
L. David Horner, III

/s/ William A. Julias Director
William A. Julias

/s/ Joseph E. Kalbach Director
Joseph E. Kalbach

/s/ J. Frank Loy Director
J. Frank Loy

/s/ George L. Romine Director
George L. Romine

/s/ John S. Scully, III Director
John S. Scully, III

/s/ J. D. Shockey, Jr. Director
J. D. Shockey, Jr.

/s/ Fred G. Wayland, Jr. Director
Fred G. Wayland, Jr.

/s/ C. Ridgely White Director
C. Ridgely White

/s/ F. Dixon Whitworth, Jr. Director
F. Dixon Whitworth, Jr.

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in this Registration
Statement of our report, dated January 28, 1994, on the consolidated financial
statements of F&M National Corporation as of December 31, 1993 and 1992 and
for each of the three years in the period ended December 31, 1993, which
report is incorporated by reference in the Annual Report on Form 10-K for the
year ended December 31, 1993 of F&M National Corporation. We also consent to
the reference made to us under the caption "Experts" in the Proxy
Statement/Prospectus constituting a part of this Registration Statement.

YOUNT, HYDE & BARBOUR, P.C.

Winchester, Virginia
February 10, 1995

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the use in this Registration Statement of our report,
dated January 14, 1994, on the financial statements of Bank of the Potomac
included herein and to the reference made to our Firm under the caption
"Experts" in the Proxy Statement/Prospectus constituting a part of this
Registration Statement.

THOMPSON & GREENSPON & CO., P.C.

Fairfax, Virginia
February 10, 1995