<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 F O R M 10 - K

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

                                December 31, 1997
 For the fiscal year ended
                          ------------------------------------------------------

                                       OR

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

 For the transition period from                             to
                                ---------------------------    -----------------

                    Commission file number 0-14553
                                           -------

                           F & M BANCORPORATION, INC.
             (Exact name of registrant as specified in its charter)

                WISCONSIN                               39-1365327
          ------------------------      -----------------------------------     
          (State of incorporation)      (I.R.S. Employer Identification No.)

ONE BANK AVENUE, KAUKAUNA, WISCONSIN                               54130
---------------------------------------                           ----------   
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code:  (920) 766-1717
                                                     ---------------     

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.00 
                                                            PAR VALUE

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


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

As of March 16, 1998, there were 9,898,170 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock (based upon the $42.00
closing sale price on that date on the NASDAQ National Market) held by
non-affiliates (excludes a total of 472,055 outstanding shares reported as
beneficially owned by directors and officers -- does not constitute an admission
as to affiliate status) was approximately $395 million.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                               PART OF FORM 10-K INTO WHICH
              DOCUMENT                    PORTIONS OF DOCUMENTS ARE INCORPORATED
              --------                    --------------------------------------

Proxy Statement for Annual Meeting of                      Part III
  Shareholders on or about May 21, 1998


<PAGE>   2



                                     PART I

ITEM 1.   BUSINESS.

          F&M Bancorporation, Inc. ("F&M" or the "Company") was formed in
1980 to acquire the shares of Farmers and Merchants Bank of Kaukauna, Wisconsin
(now known as F&M Bank- Kaukauna). F&M has grown internally and through
acquisitions from a one-bank holding company with total assets of $37 million at
its inception to a multi-bank holding company with total assets of $1.6 billion
at December 31, 1997.

          In January 1998, F&M acquired Sentry Bancorp., Inc. ("SBI"), the
holding company of Cannon Valley Bank, with total consolidated assets of $26.4
million at December 31, 1997, in a transaction being accounted for using the
purchase method of accounting. In February 1998, F&M acquired Bank of South
Wayne ("BSW"), with total assets of $19.3 million at December 31, 1997, in a
transaction being accounted for using the pooling method of accounting. See
"Recent Developments" below. Giving effect to the SBI and BSW acquisitions, F&M
had pro forma total assets of $1.7 billion at December 31, 1997. The
acquisitions of SBI and BSW occurred in 1998, all financial information and data
included in this Annual Report on Form 10-K are prior to those transactions
unless otherwise indicated. F&M does not believe that these acquisitions will
have a material effect on its financial condition or results of operations.

          Unless otherwise indicated, share and per share amounts in this Report
on Form 10-K have been restated to reflect F&M's 10% stock dividends in June
1996 and June 1997.

Recent Developments

          Pending Acquisitions

          Jefferson Acquisition. On December 31, 1997, F&M entered into an
agreement to acquire Financial Management Services of Jefferson, Inc.
("Jefferson"), the holding company for The Farmers & Merchants Bank of Jefferson
("FMBJ"). FMBJ has two offices in the city of Jefferson, in southcentral
Wisconsin. The agreement provides for the exchange of Jefferson stock for
approximately 641,975 shares of F&M Common (subject to adjustments provided in
the agreement). The transaction is expected to be completed in the second
quarter of 1998. 

          At December 31, 1997, Jefferson had total assets of $99.7 million, net
loans of $62.0 million, total deposits of $80.7 million and shareholders' equity
of $13.2 million. For the year ended December 31, 1997, Jefferson had net income
of $1.0 million. F&M expects to account for the transaction using the pooling of
interests method of accounting.

          Marshalltown, Iowa Acquisition. On December 1, 1997, F&M entered into
an agreement to acquire BancSecurity Corporation ("BancSecurity") of
Marshalltown, Iowa, the holding company for several banks located in Iowa
("BancSecurity Banks"). The BancSecurity Banks have 14 offices in central Iowa.
The agreement provides for the exchange of BancSecurity stock for approximately
$145 million in value of shares of F&M Common (subject to adjustments provided
in the agreement). The transaction is expected to be completed in the second
quarter 1998.

          At December 31, 1997, BancSecurity had total assets of $546.7 million,
net loans of $329.7 million, total deposits of $446.6 million and shareholders'
equity of $52.1 million. For the year ended December 31, 1997, BancSecurity had
net income of $3.1 million. F&M expects to account for the transaction using the
pooling of interests method of accounting.



<PAGE>   3
          Other Recent Developments

               Dundas, Minnesota Acquisition. On January 27, 1998, F&M acquired
Sentry Bancorp., Inc. ("SBI"), the holding company of Cannon Valley Bank ("CVB")
(renamed "F&M Bank-Cannon Valley"). CVB has its office in the community of
Dundas in southeastern Minnesota. The acquisition represents F&M's first office
outside of Wisconsin, and provides F&M a platform for possible future Minnesota
expansion. The acquisition was a cash transaction, in which F&M paid SBI
shareholders a total of $5.4 million. F&M is accounting for the transaction
using the purchase method of accounting.

               At December 31, 1997, SBI had total assets of $26.4 million, net
loans of $19.2 million, total deposits of $23.5 million and shareholder's equity
of $2.3 million. For the year ended December 31, 1997, SBI had net income of
$346,000.

               South Wayne Acquisition. On February 9, 1998, F&M acquired the
Bank of South Wayne ("BSW"). BSW has one office in South Wayne, in southwestern
Wisconsin. F&M acquired BSW in exchange for approximately 144,000 shares of F&M
Common. F&M is accounting for the transaction using the pooling of interests
method of accounting, although periods prior to January 1, 1998 will not be
restated because of the relatively small size of BSW as compared to F&M. F&M
intends to combine the operations of BSW and F&M Bank - Darlington in the near
future.

               At December 31, 1997, BSW had total assets of $19.3 million, net
loans of $7.8 million, total deposits of $14.7 million and shareholders' equity
of $4.5 million. For the year ended December 31, 1997, BSW had net income of
$231,000.

               Trust Company. In January 1998, F&M announced the formation of
F&M Trust Company, a Wisconsin chartered trust company. The F&M Trust Company is
continuing the trust business of F&M Bank - Kaukauna, which was established in
1996. F&M intends to expand the operations of F&M Trust Company to other
communities served by F&M subsidiary banks.

               Antigo Office Acquisition. On October 1, 1997, F&M completed the
acquisition of the Antigo branch office of Security Bank ("Security"), which was
divested in connection with Security's acquisition by Marshall & Ilsley
Corporation. The acquisition included the purchase of the branch buildings and
other fixed assets and the assumption of deposit liabilities in a cash
transaction, in which F&M's F&M Bank - Central subsidiary purchased the physical
assets and was reimbursed in cash (reduced by an agreed-upon premium) for the
assumption of deposits. Security's Antigo office had total deposits of
approximately $35 million at September 30, 1997.

               Darlington Acquisition. On August 14, 1997, F&M acquired Citizens
National Bancorp., Inc. ("CNB"), the holding company of Citizens National Bank
of Darlington. CNB, which was renamed "F&M Bank - Darlington National
Association", has two offices, in Darlington and Hazel Green (in southwest
Wisconsin). F&M acquired CNB in exchange for approximately 577,500 shares of F&M
Common. F&M is accounting for the transaction using the pooling of interests
method of accounting.

               At December 31, 1996, CNB had total assets of $75.3 million, net
loans of $48.9 million, total deposits of $65.2 million and shareholder's equity
of $9.5 million. For the year ended December 31, 1996, CNB had net income of
$653,000.

               Clear Lake Acquisition.  On August 12, 1997, F&M acquired Clear
Lake Bancorp Inc. ("CLB"), the holding company of Landmark Bank.  CLB, which 
was renamed "F&M Bank -

                                       -2-

<PAGE>   4



Landmark", has four offices in northwest Wisconsin. F&M acquired CNB in exchange
for approximately 161,000 shares of F&M Common. F&M is accounting for the
transaction using the pooling of interest method of accounting.

               At December 31, 1996, CLB had total assets of $35.0 million, net
loans of $24.5 million, total deposits of $31.8 million and shareholder's equity
of $2.1 million. For the year ended December 31, 1996, CLB had net income of
$191,000.

               Prairie du Chien Acquisition. On May 30, 1997, F&M acquired
Wisconsin Ban Corp. ("WBC"), the holding company of Prairie City Bank ("PCB").
PCB, which has been renamed "F&M Bank-Prairie du Chien", has five offices in
southwest Wisconsin. F&M acquired WBC in exchange for approximately 637,000
shares of F&M Common. Also, outstanding WBC preferred stock was redeemed for
approximately $350,000 in cash, and outstanding indebtedness of WBC to its
shareholders and affiliates, in the amount of approximately $2.6 million
(including accrued interest) was repaid in cash. F&M is accounting for the
transaction using the pooling of interests method of accounting.

               At December 31, 1996, WBC had total assets of $87.3 million, net
loans of $56.0 million, total deposits of $69.9 million and shareholders' equity
of $8.5 million. For the year ended December 31, 1996, WBC had net income of
$740,000.

               Brodhead Acquisition. On February 27, 1997, F&M acquired Green
County Bank ("GCB"), with one office in Brodhead in south-central Wisconsin. GCB
has been renamed "F&M Bank-Brodhead." F&M acquired GCB in exchange for
approximately 201,000 shares of F&M Common, in a formula amount set forth in the
definitive acquisition agreement; the total value of those shares was
approximately $5.4 million for purposes of the agreement. F&M accounted for the
transaction using the pooling of interests method of accounting, although
periods prior to January 1, 1997 were not restated because of the relatively
small size of GCB as compared to F&M.

               At December 31, 1996, GCB had total assets of $31.5 million, net
loans of $21.5 million, total deposits of $28.1 million and shareholders' equity
of $3.2 million. For the year ended December 31, 1996, GCB had net income of
$287,000.

               East Troy Acquisition. On January 10, 1997, F&M acquired East
Troy Bancshares, Inc. ("ETB"), which owned all of the shares of State Bank of
East Troy (renamed "F&M Bank-East Troy"), with one office in East Troy in
southeast Wisconsin. F&M's acquisition of ETB was made in exchange for
approximately 484,000 shares of F&M Common, valued for purposes of the
transaction at $13.5 million for purposes of the agreement. F&M accounted
for the transaction using the pooling of interests method of accounting,
although periods prior to January 1, 1997 were not restated because of the
relatively small size of ETB as compared to F&M.

               At December 31, 1996, ETB had total assets of $56.0 million, net
loans of $43.2 million, total deposits of $46.6 million and shareholders' equity
of $7.7 million. For the year ended December 31, 1996, ETB had net income of
$224,000.

               Additional Locations and Bank Combinations. In October 1997, F&M
Bank-Appleton opened an additional full-service supermarket branch in Appleton,
to complement its three other Appleton offices. In November 1997, F&M Bank-East
Troy opened a full-service express market branch in East Troy, Wisconsin, to
complement its other office in that community. In November 1997, F&M Bank-Grant
County became the successor in a merger of F&M Banks - Fennimore, Potosi and
Lancaster.

                                       -3-

<PAGE>   5



Subsidiary Banks

               At March 15, 1998, F&M owned 20 subsidiary banks (the "Banks" or
the "F&M Banks"). All but two of the Banks are Wisconsin state banks. One bank
is a national bank, which is expected to be combined with one of the Wisconsin
chartered F&M Banks in the near future; CVB is a Minnesota state bank. Each of
the F&M Banks (other than recently acquired CVB and BSW, which have not yet
become members) is a member of the Federal Reserve System. The Banks are
community banks which provide a full range of services to consumers and
businesses in small and medium-sized communities. F&M also owns F&M Trust
Company, a full-service trust company. F&M provides the benefits of holding
company affiliation while allowing the Banks to operate with considerable
autonomy.

               The following table presents certain information as to the F&M
Banks. Each of the F&M Banks is wholly-owned by F&M.

<TABLE>
<CAPTION>
                                                                  NO. OF FULL                  TOTAL
                                             YEAR               SERVICE OFFICES               ASSETS
              BANK                       ACQUIRED (1)           AT 3/15/98 (2)              AT 12/31/97
              ----                       ------------          ----------------             -----------
                                                                                           (in millions)
<S>                                          <C>                      <C>                      <C> 

F&M Bank-Kaukauna                            1980                      5                       $136.7
F&M Bank-Appleton                            1981                      4                         68.6
F&M Bank-Hilbert                             1983                      3                         31.6
F&M Bank-Winnebago County                    1985                      3                         99.6
F&M Bank-New London                          1987                      1                         37.1
F&M Bank-Central                             1987                      3                        113.9
F&M Bank-Grant County                        1988                      4                        133.9
F&M Bank-Lakeland                            1991                      7                        161.1
F&M Bank-Kiel                                1991                      1                         43.9
F&M Bank-Northeast                           1994                     11                        312.1
F&M Bank-Waushara County                     1995                      5                        110.5
F&M Bank-Superior                            1996                      1                         33.8
F&M Bank-Algoma                              1996                      2                         64.6
F&M Bank-East Troy                           1997                      2                         54.6
F&M Bank-Brodhead                            1997                      1                         31.4
F&M Bank-Prairie du Chien                    1997                      5                         91.6
F&M Bank-Landmark                            1997                      4                         39.2
F&M Bank-Darlington, N.A.(3)                 1997                      2                         77.0
F&M Bank-Cannon Valley                       1998                      1                         26.4
Bank of South Wayne(3)                       1998                      1                         19.3
</TABLE>
------------------

(1)      In the case of F&M Banks resulting from mergers, represents the date
         F&M first acquired any of the constituent banks in those mergers.
(2)      The F&M Banks also maintain a total of 51 ATM locations, certain of
         which are located at the full-service offices.
(3)      F&M intends to combine these banks in the near future under the name
         "F&M Bank- Darlington."


                                       -4-

<PAGE>   6



         F&M's network of community banks generally operates with significant
local autonomy, with general oversight and support from F&M. F&M believes this
autonomy allows the F&M Banks to better serve the customers in their respective
communities, and thus enhances the F&M Banks' business opportunities and
operations. After acquiring banks, F&M generally maintains local bank charters
and keeps intact existing management and boards of directors. Generally, F&M
Bank managements operate independently of F&M in selecting deposit products
developed by F&M and in making pricing and credit decisions. F&M maintains an
approval procedure for new loans above certain threshold amounts and provides
ongoing loan review and administration assistance and other services for the F&M
Banks. F&M encourages F&M Bank officers and employees to be active in community
groups and projects.

Markets

         F&M Banks provide services through a total of 66 full-service bank
offices in 52 Wisconsin communities and one Minnesota community. In recent
years, the economic and business environment in the State of Wisconsin and
nearby states has been relatively strong and stable. The communities in which
the F&M Banks maintain offices range in population from almost 100,000 to less
than 500. Although many of the communities in which the F&M Banks are located
are relatively small, they generally have diverse economies with representation
from many industry groups. In many communities, F&M Banks maintain the only
commercial bank offices in those communities. Each F&M Bank branch provides
complete retail banking services and full service banking for personal,
commercial and service industry customers.

Acquisition and Expansion Strategy

         The Company's strategy is to continue to grow by actively pursuing
opportunities to acquire other financial institutions and by establishing or
acquiring additional branches. The Company's primary geographic area of focus
for expansion is small metropolitan areas and other communities in Wisconsin.
F&M has recently begun pursuing out-of-state acquisitions, with one acquisition
in Minnesota and a pending acquisition in Iowa. F&M believes that markets in
nearby states can present attractive markets for future expansion, and provide
additional opportunities than those which are available in Wisconsin. However,
there can be no assurances that such acquisitions will occur, and acquisitions
outside of Wisconsin may present difficulties, due to market differences, state
law considerations, and relative distances, which could affect F&M's ability to
consummate and integrate any such acquisitions. The Company generally
concentrates on acquisitions of banks with $25 million or more in assets,
although it would consider acquiring a smaller institution (such as BSW) if the
Company would be able conveniently and economically to operate it as a branch of
a nearby Bank or other attractive factors exist.

         The Company's acquisition strategy also focuses on past performance of
the target, management strengths and weaknesses, location, community
demographics, relative health of the local economy, organizational structure of
the target, size of the target and consideration for the acquisition. In
evaluating these criteria, management considers the alternatives and costs
associated therewith to enter a particular market, and the impact of the
proposed acquisition on the Company's earnings and stock price.

         To supplement the presence it has established in various markets, and
to expand to new markets, the Banks will from time to time open additional
branch offices, including supermarket and other non-traditional branches, in
communities which warrant additional coverage. The Company also considers branch
purchases (as in the case of Antigo), the relocation of bank offices to more
attractive locations, and closing of branch offices where warranted.


                                       -5-

<PAGE>   7



         The Company believes that its experience in making acquisitions and in
assimilating acquired institutions into the Company's system, as well as its
philosophy of permitting significant independence of the management of the
Banks, position the Company well to take advantage of future expansion
opportunities. The Company believes that its experience with, and willingness to
acquire banks in smaller communities gives it an advantage in responding to
certain acquisition opportunities. These opportunities may be created by
management succession needs, desires to obtain assistance in responding to
increasing regulatory requirements, bank shareholder liquidity needs and similar
situations.

         Since its inception, the Company has experienced substantial growth
through acquisitions of other financial institutions. F&M's strategy to continue
to make acquisitions is dependent upon its ability to identify potential targets
for acquisition and consummate transactions on terms acceptable to F&M. Also,
F&M's future success is dependent in part upon its ability to integrate the
operations of, and manage over time, acquired financial institutions. F&M
acquired its first non- Wisconsin bank in 1998. F&M has pending another
acquisition in Iowa which would be the largest acquisition by F&M in terms of
both consideration paid and assets acquired. The factors of size and distance
could combine to make the pending acquisition transition more challenging for
F&M than in past acquisitions.

Business Planning and Marketing

         Company-wide plans are set each year, both for F&M and for the Banks,
and are developed after substantial input from and consultation with Bank
personnel. Progress is regularly monitored in meetings with Bank employees and
in system-wide reports. F&M also uses compensation and performance incentives
for all of its employees to help achieve the plan targets.

         F&M developed "Lifestyle Banking" for implementation by the Banks to
bolster each of their marketing efforts in the communities they serve. Lifestyle
Banking seeks to attract new customers and create broad banking relationships
with customers by focusing on their varying needs rather than attempting to
design products and services of general application or aggressively price a
particular product or service. Bank employees are trained to recognize customer
needs and take additional responsibility and initiative in marketing the Banks'
products and services to provide more individualized customer service. Lifestyle
Banking is also designed to provide a continuing customer-level source of ideas
to help the Banks better serve their customers and communities.

Lending and Investments

         The F&M Banks offer short-term and long-term loans on a secured or
unsecured basis for business or personal purposes. The F&M Banks focus their
lending activities on individuals and small businesses in their immediate market
areas. Lending has been almost exclusively within the State of Wisconsin. The
markets of the F&M Banks include a wide variety of businesses; therefore, F&M
does not believe it is unduly exposed to problems in any particular industry
group.

         F&M believes that it can best serve its customers, and thereby enhance
F&M's business, operations and profitability, by maximizing local autonomy in
credit decisions. Generally, managements of the F&M Banks operate independently
of F&M in making credit decisions. F&M maintains an approval procedure for any
new loan that exceeds a specified threshold amount (varying depending upon the
F&M Bank) or loan participations exceeding $750,000. F&M also provides
continuing loan review and administrative assistance for the F&M Banks. The
foregoing are in addition to each F&M Bank's internal loan procedures.


                                       -6-

<PAGE>   8



         The F&M Banks participate in lending guaranteed by the Small Business
Administration and/or the Federal Housing Administration. For residential
customers, the F&M Banks make mortgage loans and offer a variety of programs
which are for resale in secondary mortgage markets or which are retained in the
F&M Banks' portfolios. F&M does not have any substantial business with foreign
obligors.

         Real Estate Loans. Real estate loans include residential mortgages and
agricultural real estate, commercial real estate and construction loans. On a
company-wide basis, real estate lending represents F&M's largest category of
loans outstanding. At December 31, 1997, residential, commercial and
agricultural real estate loans represented approximately 62.5% of loans
outstanding, the majority of which consists of residential real estate first
mortgages, with real estate construction loans approximating an additional 3.3%
of the portfolio.

         F&M originates residential mortgage loans which generally are
long-term, with either fixed or variable interest rates. F&M's general policy,
which is subject to review by management as a result of changing market and
economic conditions, and other factors, is to retain all variable interest rate
mortgage loans in its portfolio and to sell all long-term fixed interest rate
mortgage loans to the secondary market, but retaining servicing rights to most
of those loans. Variable interest rate real estate loans are generally
repriceable on an annual basis or may be adjusted at F&M's discretion. All
commercial and agricultural real estate loans are written on an adjustable
basis, the majority of which are tied to the prime rate, or short-term fixed
rate basis. F&M believes the most significant risks relating to real estate
loans result from possible declines in value of the real estate securing loans,
as well as the borrower's ability to repay.

         Commercial and Industrial Loans. Loans in this category principally
include loans to service, retail, wholesale and manufacturing businesses. At
December 31, 1997, approximately 20.4% of loans outstanding were in this
category. The F&M Banks provide both secured and unsecured loans and lines of
credit for the operations and expansion needs of local business. The F&M Banks
generally look to a borrower's business operations as the principal source of
repayment, but they also receive, when appropriate, mortgages on real estate,
security interests in inventory, accounts receivable and other personal
property, and/or personal guaranties. Repayment risk relating to commercial and
industrial loans generally relates to the success or failure of the underlying
business enterprise.

         Agricultural Loans. There is a strong focus on the agricultural
industry in many of the communities in which F&M Banks' offices are located. The
agricultural products produced in these communities vary significantly, and
include dairy, livestock, vegetables and other cash crops. At December 31, 1997,
approximately 6.6% of loans outstanding were made to agricultural producers,
excluding agricultural real estate lending which constitutes an additional
approximately 5.0% of loans. These loans are in a variety of communities and
relate to a variety of agricultural commodities, thus lessening F&M's exposure
to weaknesses in any one geographical area or type of agricultural production.
Because of the breadth and relative health of Wisconsin's agricultural
industries, F&M has not experienced significant system-wide problems in
agricultural-related loans. Credit risks relating to agricultural loans
generally depend upon varying commodity prices and crop conditions which affect
agricultural producers.

         Installment and Other Consumer Loans. F&M makes installment and other
consumer loans, including automobile loans, home improvement loans and personal
lines of credit. At December 31, 1997, approximately 7.2% of the loans were
installment or other consumer loans. F&M believes that consumer loans often
represent the beginning of a long-term banking relationship with new customers.
Credit risks relating to installment and consumer loans include the risks
relating to the

                                       -7-

<PAGE>   9



repayment capacity of the borrower involved and the depreciation of the assets
used as collateral for such loans.

         Other Investments. F&M maintains a diversified portfolio of
investments, primarily consisting of U.S. Treasury securities, obligations of
U.S. government corporations and agencies, and obligations of states and their
political subdivisions. The portfolio includes limited mortgage-backed
securities. F&M attempts to balance its portfolio to meet its liquidity needs
while endeavoring to maximize investment income, and to maximize tax advantages.

Deposits

         Each of the F&M Banks offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market accounts, and certificates of deposit. Deposits at each F&M
Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
statutory limits.

         Local managements of the F&M Banks are given significant latitude in
determining and pricing the depository products offered. F&M makes a general
determination of the deposit products which may be offered by the F&M Banks, and
its corporate staff regularly consults with local management in developing new
products which may be appropriate for local communities. However, local
management selects which of F&M's various products can be most successfully
offered in the various communities which its F&M Bank serves. In addition, local
management is given the flexibility to price deposit products locally, to best
compete in an F&M Bank's particular marketplace.

Other Customer Services and Products

         Effective in January 1998, F&M established F&M Trust Company as a
separate subsidiary, and began operations of trust services through that
subsidiary. Previously, F&M Banks-Kaukauna and Lancaster had offered trust
services.

         Other aspects of the business of the Banks include safety deposit box
services, and the sale and purchase of U.S. government securities, obligations
of U.S. government agencies, obligations of state and political subdivisions and
other similar securities. The Banks use repurchase agreements on a limited
basis, primarily with municipal customers.

         Certain of the Banks have established "Investment Centers" which,
through arrangements with other service providers, offer securities brokerage
services, annuities, and mutual fund products in addition to the other banking
products and services offered by the Banks.

Administration of the Banks

         Although each of the Banks operates with a significant level of
independence, F&M has centralized operations for certain functions, and makes
available its corporate staff and centralized resources for other functions upon
request. In early 1997, the Corporation reorganized its bank subsidiaries under
five regions, with teams of bank and holding company officers to oversee the
operations of the Banks within those regions.



                                       -8-

<PAGE>   10



         Credit-Related Services. Initial customer credit decisions are made by
the local management of each Bank. To assist local management and to maintain
system-wide credit standards, F&M has established a system-wide credit committee
to review credits to the extent lending proposals exceed threshold amounts for
the Banks, or if a Bank wishes to participate in a credit with other Banks. See
"Lending and Investments" above. In addition, F&M's corporate staff will provide
individual Banks with assistance on credit review and collection upon request.
Internal audit and compliance officers of F&M regularly review the Banks'
lending portfolios and require periodic reports from the Banks as to outstanding
credits and their quality.

         Investments. To help maximize the investment return to F&M and the
Banks, F&M has centralized investment functions through commonly-managed
investment subsidiaries of each Bank. F&M has determined that this centralized
investment management strategy is more efficient and economical and creates the
possibility for more advantageous investment returns to the Banks than would be
possible with each Bank independently managing its investment portfolio.

         Data Processing and Information Systems. F&M has contracted with an
outside provider for data processing services through a combination of on-site
Bank personnel and remote processing hardware and software. Under this
arrangement, hardware and software are being maintained at remote locations
although F&M has the option to acquire both the hardware and the software to
perform the data processing in-house if that is subsequently deemed in its best
interests. F&M provides data processing services to nine of the Banks through
this arrangement. Other processing methods are now being utilized for the other
Banks (in the case of seven of the Banks, because their relatively recent
acquisitions by F&M).

         F&M is currently evaluating various options for its data processing
services, which may include expansion of the current arrangements to additional
F&M Banks or the entry into a new arrangement. F&M would expect to adopt a
solution which it would use system-wide. While it is expected that F&M would
continue to utilize an outsourcing arrangement for most of its data processing
needs, a final decision has not been made. Future costs for processing services,
or capital expenditures related to data processing, could change depending upon
the ultimate determination of data processing issues.

         Like other financial institutions, F&M must assure that its computer
and other systems are "year 2000 compliant" (meaning capable of operating, and
accurately recognizing dates and processing information, in and after the year
2000). To help assure that F&M's systems are year 2000 compliant on a timely
basis, F&M began a focused compliance program, and has designated an F&M
employee to coordinate F&M's year 2000 compliance efforts. As part of that
effort, F&M is monitoring year 2000 compliance efforts by its suppliers, because
many of F&M's affected systems (such as data processing) are contracted from
third parties and a significant part of F&M being year 2000 compliant requires
such compliance by the third parties. Based in part upon information being
received from these third parties, F&M currently believes that it will be year
2000 compliant on a timely basis to avoid material operational disruptions and
to comply with the requirements of its regulators. To date, F&M has not
identified material expenditures which will be required to become year 2000
compliant. However, there can be no assurance that such operational difficulties
or expenditures will not be identified or experienced in the future.

         The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. While the
Company's community banking strategy stresses "traditional" personal service,
the Company's future success will depend in part on its ability to address the
needs of its customers by using technology to provide products and services that
will satisfy customer demands for

                                       -9-

<PAGE>   11



convenience as well as to create additional efficiencies in F&M's bank
operations. Many of F&M's competitors have substantially greater resources to
invest in technological improvements.

         Other Operations and Services. F&M provides other services for the
benefit of the Banks such as marketing assistance, human resources services and
benefits administration, internal audit and centralized purchasing of supplies.
F&M believes that centralizing these services promotes efficiency and cost
savings for the Banks without interfering with their community-oriented
management.

Competition

         The F&M Banks actively compete with other financial institutions and
businesses in both attracting and retaining deposits and making loans. Direct
competitors include banks, savings and loans and credit unions. These
institutions offer direct competition in the areas of deposits and loans. Other
competitors include insurance companies, securities brokerage firms, trust
companies and investment management firms which also offer competition for many
of the services offered by the F&M Banks, such as discount brokerage and
annuities.

         F&M believes it has a competitive advantage because in many
communities, F&M Bank office locations represent the only commercial bank office
in those communities. However, in some of these communities, savings and loan
associations, savings banks and/or credit unions also maintain offices, and
there are bank offices located in other nearby communities. Competition with
other financial institutions and businesses can affect the Banks' ability to
obtain and retain customers as well as the pricing levels of their products and
services. F&M believes its focus on establishing continuing banking
relationships and on individualized customer service provides additional
competitive advantages.

         F&M also faces competition in seeking institutions to acquire.
Wisconsin has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than F&M
(including several out-of-state holding companies) are actively pursuing
acquisitions in Wisconsin. Similar conditions affect acquisition opportunities
in other nearby states such as Minnesota and Iowa. This competition affects the
available acquisition opportunities for F&M and can affect the costs of such
acquisitions.

Regulation and Supervision

         The banking industry is highly regulated by both federal and state
regulatory authorities. Regulation includes, among other things, capital and
reserve requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, and is not within the control of F&M. This regulation
substantially affects the business and financial results of all financial
institutions and holding companies, including F&M and the F&M Banks.

         All but two of the F&M Banks are incorporated under the banking laws of
Wisconsin. Each of the Wisconsin-chartered F&M Banks is therefore subject to
supervision and regulation by the Wisconsin Department of Financial Institutions
(the "Department") through its Division of Banking. One of the F&M Banks is
chartered in Minnesota, and is subject to the supervision and regulation by the
Minnesota Department of Commerce. Another F&M Bank is a national bank, regulated
by the federal Office of the Comptroller of the Currency; it is expected that
this Bank will be merged into one of the Wisconsin chartered banks in the near
future.

                                      -10-

<PAGE>   12

         Each of the F&M Banks (except in certain instances recently acquired
banks, which are expected to apply for membership) is a member of the Federal
Reserve System, and is therefore subject to regulation by the Federal Reserve
Board. The deposits of each of the banks are insured, up to statutory limits, by
the FDIC. As a registered bank holding company under the Bank Holding Company
Act of 1956, F&M itself is subject to review and regulation by the Federal
Reserve Board. F&M, as a holding company, is also subject to review and
examination by the Department under Wisconsin law.

         In addition to general requirements that banks retain specified levels
of capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without the approval of the Department be paid out of current earnings or, no
more than once within the immediate preceding two years, out of undivided
profits in the event there have been insufficient net profits. Any other
dividends require the prior written consent of the Department. Each of the F&M
Banks is in compliance with all applicable capital requirements. Each of the F&M
Banks may pay dividends to F&M.

         Under federal legislation enacted in 1994, beginning in September 1995
Wisconsin bank holding companies, including F&M, have been allowed to acquire
banks and holding companies nationwide, and holding companies in all other
states will be allowed to acquire banks and holding companies in Wisconsin.
Wisconsin law generally requires the approval of the Department for all
acquisitions of banks in Wisconsin, whether by Wisconsin or out-of-state
entities. Interstate bank mergers, under specified circumstances, would be
permitted beginning in 1997. In 1997, F&M began to actively pursue acquisitions
of institutions outside of Wisconsin (see "Recent Developments"). Wisconsin and
Minnesota law permit establishment of full service bank branch offices
statewide.

         F&M, as a member of the banking industry, is affected by general
economic conditions, particularly as those conditions affect the Wisconsin
communities served by the F&M Banks. A financial institution's earnings also
depend to a large extent upon the relationship between the cost of funds
(primarily deposits) and the yield on earning assets (loans and investments).
This relationship, known as the interest rate margin, is subject to fluctuation
and is affected by regulatory, economic and competitive factors which influence
the volume and rate of interest on interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets.

Statistical Information

         The principal sources of income for the subsidiary banks of F&M are
interest and fees on loans, interest on short-term investments and interest on
securities. The total operating income and the percentage of each to total
operating income is shown below:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
           ITEM OF INCOME                    1997           1996          1995
--------------------------------------------------------------------------------------------
<S>                                       <C>            <C>          <C>
Interest and fees on loans
 and short-term borrowings                     80.8%         79.4%        78.4%
Interest on securities                         12.5%         14.4%        15.8%
Non-interest income                             6.7%          6.2%         5.8%
Total operating income (in thousands)     $  131,361    $  105,496    $  92,928

</TABLE>

F&M and its subsidiaries do not have any material foreign deposits, loans or
operations.

                                      -11-

<PAGE>   13
         The following statistical information is offered in response to the
Securities and Exchange Commission's "Guide 3 - Statistical Disclosures by Bank
Holding Companies". Certain of that information is included in the Company's
Management's Discussion and Analysis of Results of Operations and Financial
Condition" ("MD&A") at Item 7 hereof, and is incorporated in this section by
reference thereto.

I.   A. & B.      DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S
                  EQUITY - INTEREST RATES AND DIFFERENTIALS

                  Incorporated by reference from MD&A under the caption "Results
                  of Operations Net Interest Income."

I.   C.           INTEREST INCOME AND EXPENSE VOLUME AND RATE CHANGE

                  Incorporated by reference from MD&A under the caption "Results
                  of Operations Net Interest Income."

II.  A.           INVESTMENT PORTFOLIO

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Investment Portfolio."

II.  B.           RELATIVE MATURITIES & WEIGHTED AVERAGE INTEREST RATES

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Investment Portfolio."

III.              LOAN PORTFOLIO

A.                TYPES OF LOANS

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Loan Portfolio."

         The Company does not have any loans known to be to foreign obligors.
The Company is not lessee under leases which, in the aggregate, are material to
it. To the extent the Company utilizes lease financing for its customers, the
leases are accounted for as loans, and included in the appropriate loan
categories.

B.                MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST
                  RATES

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Loan Portfolio."

C.                RISK ELEMENTS

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - NonPerforming Assets."

D.                OTHER INTEREST BEARING ASSETS

                  None

                                      -12-

<PAGE>   14

IV.  A.           SUMMARY OF LOAN LOSS EXPERIENCE

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Summary of Loan Loss Experience."

IV.  B.           ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

                  Incorporated by reference from MD&A under the caption
                  "Financial Condition - Allocation of Allowance for Loan Loss."

V.                DEPOSITS

The Companies average balances of deposits and the average rate paid on these
deposits during the years ended December 31, 1997, 1996 and 1995 are:

<TABLE>
<CAPTION>

                                                            1997                         1996                          1995
                                             ---------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS                                 BALANCE   RATE                BALANCE   RATE                BALANCE    RATE
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>              <C>          <C>                <C>        <C>  
Non-interest bearing demand
  deposits                                        $  157,753     ---            $  130,030     ---              $ 112,386    ---
Interest bearing demand deposits                     115,703   1.73%               104,709   1.87%                 98,843   1.95%
Saving deposits                                      368,218   3.65%               281,121   3.28%                233,039   2.98%
Time deposits                                        634,498   5.77%               550,905   5.71%                504,325   5.59%
------------------------------------------------------------------------------------------------------------------------------------
Total                                             $1,276,172                    $1,066,765                      $948,593
====================================================================================================================================
</TABLE>

The amount of time certificates of deposit issued in amounts of $100,000 or 
more and outstanding as of December 31, 1997 is: $149,642,000.  Their maturing
distribution is as follows:

         --  three months or less                                    $66,971,000
         --  over three months and through twelve months             $68,187,000
         --  over one year                                           $14,484,000

Neither F&M or its subsidiaries have any deposits in foreign banking offices.

VI.               RETURN ON EQUITY AND ASSETS

The various ratios are included in the MD&A under the caption "Results of
Operations" and "Financial Condition - Capital Adequacy" and are incorporated by
reference thereto.



                                      -13-

<PAGE>   15



VII.              SHORT-TERM BORROWINGS

The comparison of short-term borrowings as of each indicated December 31
follows:

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                            1997         1996        1995
--------------------------------------------------------------------------------
<S>                                          <C>           <C>         <C>
Federal funds purchased and securities
sold under repurchase agreement               $47,685      $42,263     $12,627

Other short-term borrowings                       ---          ---         ---
--------------------------------------------------------------------------------
Totals                                        $47,685      $42,263     $12,627
================================================================================
</TABLE>



The following information relates to federal funds purchased and securities sold
under repurchase agreements for the years ended December 31:
<TABLE>
<CAPTION>

DOLLARS IN THOUSANDS                       1997           1996           1995
--------------------------------------------------------------------------------
As of end of year:

<S>                                    <C>            <C>            <C>
  Weighted average rate                      6.62%          6.37%          5.65%

For the year:

  Maximum amount outstanding           $   79,021     $   45,237     $   31,904

  Average amount outstanding           $   56,678     $   33,833     $   18,062

  Weighted average rate                      5.80%          5.47%          5.78%
</TABLE>


ITEM 2.        PROPERTIES.

         Of the Banks' 66 total offices, 60 are located in buildings which are
owned by the respective Banks. Five grocery store or market offices and one
other branch office locations are located in leased facilities; the leases are
short-term, which the Company believes is appropriate for the particular
locations. In addition, the Company owns its headquarters building in Kaukauna,
Wisconsin.

         All of the owned facilities are designed for commercial banking
operations. All facilities used by the Company and the Banks are suitable for
their current and anticipated expanded utilization, although the Company
regularly reviews whether any changes or improvements would be advisable.

ITEM 3.        LEGAL PROCEEDINGS.

         The Company is not a party to any legal proceedings other than routine
litigation which is not material to its business.


                                      -14-

<PAGE>   16



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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information regarding the
executive officers of F&M. Executive officers are elected annually by the Board
of Directors, and serve at the discretion of the Board.

<TABLE>
<CAPTION>


                                       AGE AT
NAME                                   3/15/98                POSITION(S)
----                                   -------                -----------
<S>                                <C>                        <C>
John W. Johnson                            43                 President, Chief Executive Officer
                                                                and Director
Gail E. Janssen                            67                 Chairman of the Board and Director
Douglas A. Martin                          46                 Vice President and Director
Daniel E. Voet                             34                 Chief Financial Officer and Treasurer
Donna R. Habert                            47                 Vice President-Data Processing
Janet M. Lakso                             55                 Vice President-Administration and
                                                                Secretary
Bartholomew Salazar                        34                 Vice President-Investments
Linda K. Seefeldt                          43                 Vice President-Marketing
Peter H. Smaby                             36                 Vice President-Credit Administration
Darlene M. Vanden Boogart                  39                 Vice President-Audit
Constance M. Verbruggen                    38                 Vice President-Human Resources
</TABLE>

          Mr. Johnson has served as President of F&M since July 1997 and as its
Chief Executive Officer since November 1997. Mr. Johnson previously served as a
Vice President of F&M since 1994. Mr. Johnson was President and Chief Executive
Officer of F&M Bank-Northeast and a predecessor since 1989. Mr. Johnson
was elected to F&M's Board of Directors in April 1994, as contemplated by F&M's
acquisition of  Pulaski Bancshares, Inc.

          Mr. Janssen has served as Chairman and a director of F&M since its
inception. Mr. Janssen also serves as Chairman of the Board of F&M
Bank-Kaukauna. Mr. Janssen served as President of F&M from its inception until
1996, and as Chief Executive Officer of F&M from its inception until 1997. F&M
has historically considered itself highly dependent upon the services of Mr.
Janssen, although recent changes in management structure, including the
designation of Mr. Johnson as President and Chief Executive Officer, were
intended in part to lessen that dependence.

          Mr. Martin became a Vice President of F&M in 1992. Mr. Martin became
Chairman of the Board of F&M Bank-Grant County in 1994. Mr. Martin has been
President and Chief Executive Officer of F&M Bank-Grant County since 1985, and
has served as a director of F&M since 1990.

          Mr. Voet became Chief Financial Officer in 1994 and Treasurer in 1993.
Mr. Voet previously served as Corporate Accountant of F&M since 1991, before
which he was a certified public accountant in private practice.


                                      -15-

<PAGE>   17



          Ms. Habert became Vice President-Data Processing of F&M in 1993. Prior
to that time, she was Assistant Vice President-Data Processing since 1989. Ms.
Habert had been employed by F&M Bank-Kaukauna since 1971.

          Ms. Lakso became F&M's Vice President-Administration in 1993 and
Secretary at year end 1994. Ms. Lakso was Assistant Vice
President-Administration since 1992. Ms. Lakso has served F&M since 1980 as
assistant to the President, and was first employed by F&M Bank-Kaukauna in 1970.

          Mr. Salazar joined F&M as Assistant Vice President-Investments in 1992
and became Vice President-Investments in 1993. Prior to joining F&M, Mr. Salazar
was employed by another financial institution in a variety of positions
including Manager of Wire Transfer Operations, Manager of Float Control
Operations, Investment Portfolio Manager and as a financial analyst.

          Ms. Seefeldt joined F&M as Vice President-Marketing in 1990.
Previously, she served as Marketing Director of another Wisconsin bank holding
company.

          Mr. Smaby became Vice President-Credit Administration in 1993. Mr.
Smaby joined F&M in 1987 as a loan review and compliance officer, and was named
Assistant Vice President- Compliance/Loan Review in 1990.

          Ms. Vanden Boogart became Vice President-Audit in 1993. Ms. Vanden
Boogart began employment with F&M Bank-Kaukauna in 1976, and served F&M as Audit
Manager from 1987 to 1993.

          Ms. Verbruggen joined F&M as Vice President-Human Resources in March
1995. Ms. Verbruggen was Human Resources Director at Shawano Community Hospital
from 1993 to 1995, and previously served as Human Resource Manager for CMD
Corporation.

          F&M and its subsidiaries employed approximately 690 persons on a
full-time equivalent basis at December 31, 1997.

                                    * * * * *

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

          The discussions in this Report on Form 10-K and the documents
incorporated herein by reference which are not statements of historical fact
(including statements in the future tense and those which include terms such as
"believe", "will", "expect" and "anticipate") contain forward-looking
statements that involve risks and uncertainties. The Company's actual future
results could materially differ from those discussed. Factors that could cause
or contribute to such differences include, but are not limited to, acceptance of
new products and services, the Company's future lending and collection
experience, the effects of acquisitions, competition from other institutions,
changes in the banking industry and its regulation, needs for technological
change, and other factors including those discussed in Item 1 above in this
Report and in the Management's Discussion and Analysis in Item 7, as well as
those discussed elsewhere in this Report and the documents incorporated herein
by reference.



                                      -16-

<PAGE>   18



                                     PART II

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

               F&M Common Stock trades on The NASDAQ Stock Market ("NASDAQ")
under the symbol "FMBK". F&M had approximately 3,150 shareholders of record at
March 1, 1998. The following table summarizes high and low prices and cash
dividends paid for F&M Common Stock for the periods indicated.

<TABLE>
<CAPTION>
     
                                                                                      CASH DIVIDENDS
          CALENDAR PERIOD                         HIGH                LOW             PAID PER SHARE
-------------------------------                   ----                ---             --------------
<S>              <C>                             <C>                <C>                        <C> 

1996             1st quarter                     23.55              20.05                      .149
                 2nd quarter                     28.64              22.32                      .149
                 3rd quarter                     28.64              25.68                      .155
                 4th quarter                     29.09              27.05                      .155
1997             1st quarter                     29.09              25.91                      .18
                 2nd quarter                     40.25              26.36                      .18
                 3rd quarter                     39.50              34.00                      .20
                 4th quarter                     41.50              36.50                      .20
</TABLE>


          F&M has paid quarterly or annual cash dividends since its inception.
The holders of F&M Common Stock are entitled to receive such dividends as are
declared by the board of directors of F&M, which considers (and may change)
payment of dividends quarterly. For the first quarter of 1998, F&M has paid a
dividend of $.22 per share.

          The ability of F&M to pay dividends is dependent upon the receipt of
dividends from the F&M Banks, payment of which is subject to regulatory
restrictions. In determining cash dividends, the board of directors of F&M
considers the earnings, capital requirements, debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators,
financial condition of F&M and the F&M Banks, and other relevant factors. See
Note 15 of Notes to F&M's Consolidated Financial Statements and the discussion
under "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Financial Condition--Capital Adequacy," incorporated herein
by reference, for restrictions on the ability of the F&M Banks to pay dividends.

ITEM 6.   SELECTED FINANCIAL DATA.

          Incorporated by reference to the Selected Financial Data of the
Company appearing at page F-42 of this report on Form 10-K.

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

          Incorporated by reference to the Management's Discussion and Analysis
of the Company appearing at pages F-43 through F-62 of this report on Form 10-K.


                                      -17-

<PAGE>   19



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

          Incorporated by reference to the third through sixth paragraphs under
"Liquidity, Interest Sensitivity and Market Risk Management" in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing at page F-60 of this report on Form 10-K.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          Incorporated by reference to the financial statements of the Company
appearing at pages F-1 through F-41 of this report on Form 10-K, and to Summary
Quarterly Financial Information appearing at page F-62 of this report on Form
10-K. Also see the "Index to Financial Statements and Financial Statement
Schedules" filed as part of Item 14(a) hereof.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

          Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          Information in response to this item is incorporated herein by
reference to "Election of Directors", "Executive Compensation," and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement to be filed pursuant to Regulation 14A for its Annual Meeting of
Shareholders to be held on or about May 21, 1998 ("1998 Proxy Statement"), and
"Executive Officers of the Registrant" in Part I hereof.

ITEM 11.  EXECUTIVE COMPENSATION.

          Incorporated by reference to "Election of Directors", "Executive
Compensation" (excluding "Compensation Committee Report on Executive
Compensation" therein) and "Compensation Committee Interlocks and Insider
Participation" in the 1998 Proxy Statement.

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

          Information in response to this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management" in
the 1998 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          Incorporated by reference to "Transactions with the Corporation" in
the 1998 Proxy Statement.



                                      -18-

<PAGE>   20


                                     PART IV

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

(a)       DOCUMENTS FILED:

               1 and 2.    Financial Statements and Financial Statement
                           Schedules. See the following "Index to Financial
                           Statements and Financial Statement Schedules," which
                           is incorporated herein by reference.

               3.          Exhibits.  See Exhibit Index included as last part of
                           this report, which is incorporated herein by 
                           reference.

(b)       REPORTS ON FORM 8-K:

          No reports on Form 8-K were filed by the Company during the fourth
          quarter of 1997.

       INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

          CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION

                 Years Ended December 31, 1997, 1996 and 1995

                                                                       Page

Independent Auditor's Report..........................................  F-1

Financial Statements:

         Consolidated Balance Sheets..................................  F-2

         Consolidated Statements of Income............................  F-4

         Consolidated Statements of Stockholders' Equity..............  F-6

         Consolidated Statements of Cash Flows........................  F-8

         Notes to Consolidated Financial Statements................... F-10

                                                      *  *  *

Selected Financial Data............................................... F-42

Management's Discussion and Analysis.................................. F-43

Summary Quarterly Financial Information............................... F-62





                                      -19-
<PAGE>   21
                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
F&M Bancorporation, Inc.
Kaukauna, Wisconsin


We have audited the accompanying consolidated balance sheets of F&M
Bancorporation, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
F&M Bancorporation, Inc. and Subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.



                                              /s/Wipfli Ullrich Bertelson LLP
                                              -------------------------------
                                              Wipfli Ullrich Bertelson LLP

January 23, 1998
Appleton, Wisconsin





                                      F-1
<PAGE>   22
                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                          CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996
                             (Dollars in Thousands)
--------------------------------------------------------------------------------


                                     ASSETS
<TABLE>
<CAPTION>

                                                                               1997                  1996
                                                                               ----                  ----

<S>                                                                      <C>                   <C>
Cash and due from banks                                                  $        56,581       $        49,406
Federal funds sold                                                                36,747                23,286
                                                                         ---------------       ---------------

   Cash and cash equivalents                                                      93,328                72,692

Investments:
   Interest-bearing deposits in other financial
    institutions                                                                     194                   196
   Investment securities available for sale -
    Stated at fair value                                                         178,403               154,746
   Investment securities held to maturity -
    Fair value of $133,040 in 1997 and
     $96,824 in 1996                                                             128,240                95,030

Total loans
                                                                               1,197,895               970,554
   Allowance for credit losses                                                   (15,090)              (12,319)
                                                                         ---------------       ---------------- 

Net loans                                                                      1,182,805               958,235

Premises and equipment                                                            32,858                29,623
Other assets                                                                      30,175                25,380
                                                                         ---------------       ---------------





TOTAL ASSETS                                                             $     1,646,003       $     1,335,902       
                                                                         ===============       =============== 
</TABLE>





                                      F-2
<PAGE>   23




--------------------------------------------------------------------------------


                     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----

<S>                                                                      <C>                   <C>
Liabilities:
   Non-interest-bearing deposits                                         $       180,312       $        150,849
   Interest-bearing deposits                                                   1,193,060                989,522
                                                                         ---------------       ---------------- 

   Total deposits                                                              1,373,372              1,140,371

   Short-term borrowings                                                          47,685                 42,263
   Other borrowings                                                               60,929                 18,194
   Other liabilities                                                              15,174                 12,869
                                                                         ---------------       ---------------- 

      Total liabilities                                                        1,497,160              1,213,697
                                                                         ---------------       ---------------- 

Commitments and contingent liabilities (Note 18)

Stockholders' equity:
   Common stock - $1 par value:
      Authorized - 20,000,000 shares
      Issued - 9,779,130 and 8,173,255 shares
       at December 31, 1997 and 1996,
         respectively                                                              9,779                  8,173
   Capital surplus                                                                86,334                 60,537
   Retained earnings                                                              53,101                 54,629
   Unrealized gain (loss) on securities                                                            
      available for sale -
    Net of tax                                                                        21                   (473)
   Less - Common stock held in treasury, at cost -
    24,020 and 34,750 shares at December 31,
    1997 and 1996, respectively                                                     (392)                  (661)
                                                                         ---------------       ---------------- 

      Total stockholders' equity                                                 148,843                122,205
                                                                         ---------------       ----------------




TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $     1,646,003       $      1,335,902
                                                                         ===============       ================
</TABLE>


          See accompanying notes to consolidated financial statements.





                                      F-3
<PAGE>   24

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES                  
      -------------------------------------------------------------------    
                      CONSOLIDATED STATEMENTS OF INCOME
                 Years Ended December 31, 1997, 1996, and 1995               
               (Dollars in Thousands, Except Earnings Per Share)              
------------------------------------------------------------------------------- 



<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
<S>                                                <C>                   <C>                 <C>     
Interest income:
   Interest and fees on loans                      $       104,539       $        82,330       $        71,938
   Interest on investment
    securities:
      Taxable                                                9,830                 9,816                10,148
      Tax-exempt                                             6,560                 5,329                 4,580
   Other interest income                                     1,618                 1,434                   906
                                                   ---------------       ---------------       ---------------

      Total interest income                                122,547                98,909                87,572
                                                   ---------------       ---------------       ---------------

Interest expense:
   Deposits                                                 52,035                42,637                37,035
   Short-term borrowings                                     3,286                 1,850                 1,045
   Other borrowings                                          2,524                   887                 1,326
                                                   ---------------       ---------------       ---------------

      Total interest expense                                57,845                45,374                39,406
                                                   ---------------       ---------------       ---------------

Net interest income                                         64,702                53,535                48,166
Provision for credit losses                                  2,826                 2,904                 1,713
                                                   ---------------       ---------------       ---------------

Net interest income after
   provision for credit losses                              61,876                50,631                46,453
                                                   ---------------       ---------------       ---------------

Other income:
   Service fees                                              4,430                 3,392                 2,971
   Net security gains                                          194                    59                    34
   Other operating income                                    4,190                 3,136                 2,351
                                                   ---------------       ---------------       ---------------

      Total other income                                     8,814                 6,587                 5,356
                                                   ---------------       ---------------       ---------------

Other expenses:
   Salaries and employee
    benefits                                                22,972                18,750                16,438
   Net occupancy expense                                     5,823                 4,702                 4,424
   FDIC assessment                                             155                   120                 1,087
   Data processing                                           1,617                 1,533                 1,586
   Goodwill amortization                                       689                   524                   398
   Other operating expenses                                 10,098                 9,191                 7,927
                                                   ---------------       ---------------       ---------------

      Total other expenses                                  41,354                34,820                31,860
                                                   ---------------       ---------------       ---------------

</TABLE>




                                      F-4
<PAGE>   25


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES                
      -------------------------------------------------------------------    
                CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
                 Years Ended December 31, 1997, 1996, and 1995               
               (Dollars in Thousands, Except Earnings Per Share)              
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                         1997                  1996                  1995
                                                         ----                  ----                  ----

<S>                                                <C>                  <C>                   <C>
Income before provision for
   income taxes                                    $        29,336       $        22,398       $         19,949
Provision for income taxes                                   9,011                 6,992                  6,109
                                                   ---------------       ---------------       ----------------

Net income                                         $        20,325       $        15,406       $         13,840
                                                   ===============       ===============       ================

Earnings per share - Basic                         $          2.09       $          1.73       $           1.59
                                                   ===============       ===============       ================

Earnings per share - Diluted                       $          2.08       $          1.73       $           1.59
                                                   ===============       ===============       ================

</TABLE>

          See accompanying notes to consolidated financial statements.





                                      F-5
<PAGE>   26


                                                                               
                   F&M BANCORPORATION, INC. AND SUBSIDIARIES                  
      -------------------------------------------------------------------     
               CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                 Years Ended December 31, 1997, 1996, and 1995               
                            (Dollars in Thousands)
--------------------------------------------------------------------------------





<TABLE>
<CAPTION>
                                                                         Common Stock                Capital
                                                                 -------------------------                  
                                                                    Shares             Amount            Surplus    
                                                                 --------------   ---------------    ---------------

<S>                                                             <C>             <C>               <C>
Balance, January 1, 1995                                            6,221,247    $        6,221    $         43,664
Poolings of interests:
   Wisconsin Ban Corp.                                                579,100               579                  12
   Citizens National Bancorp, Inc.                                    577,465               577                 368
                                                                 ------------    --------------    ----------------

Balance, January 1, 1995, as restated                               7,377,812             7,377              44,044
Net income
Cash dividends declared
Exercise of stock options                                                                                       (25)
Purchase of 40,000 shares of treasury
   common stock
Change in unrealized gain (loss) on
   securities available for sale -
   Net of tax                                                                                                       
                                                                 ------------    --------------    ----------------

Balance, December 31, 1995                                          7,377,812             7,377              44,019
Acquisition of Monycor Bancshares,
   Inc.                                                               157,563               158                 649
Net income
Ten percent stock dividend                                            637,880               638              15,900
Cash dividends declared
Exercise of stock options                                                                                       (31)
Change in unrealized gain (loss) on
   securities available for sale -
   Net of tax                                                                                                       
                                                                 ------------    --------------    ----------------

Balance, December 31, 1996                                          8,173,255             8,173              60,537
Acquisition of East Troy Bancshares,
   Inc.                                                               439,993               440                 494
Acquisition of Green County Bank                                      182,967               183               1,617
Acquisition of Clear Lake Bancorp, Inc.                               161,040               161               1,535
Net income
Ten percent stock dividend                                            821,875               822              22,193
Cash dividends declared
Exercise of stock options                                                                                       (42)
Change in unrealized gain (loss)
  on securities available for sale - 
  Net of tax                                                      
                                                                 ------------    --------------    ----------------
                                                                    
Balance, December 31, 1997                                          9,779,130    $        9,779    $         86,334
                                                                 ============    ==============    ================
</TABLE>

                                      F-6
<PAGE>   27





--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                 Unrealized
                                               Gain (Loss) on
                                                Securities
        Retained            Treasury           Available for
        Earnings              Stock           Sale - Net of Tax           Total     
      --------------     ---------------      -----------------      ---------------
      <S>                <C>               <C>                      <C>
      $       36,694     $          (110)   $            (3,538)     $        82,931

               5,954                                       (389)               6,156
               8,167                                       (393)               8,719
      --------------     ---------------    -------------------      ---------------

              50,815                (110)                (4,320)              97,806
              13,840                                                          13,840
              (4,308)                                                         (4,308)
                                     131                                         106
                                    (845)                                       (845)

                                                          4,364                4,364
      --------------     ---------------    -------------------      ---------------

              60,347                (824)                    44              110,963
                 838                                                           1,645
              15,406                                                          15,406
             (16,538)
              (5,424)                                                         (5,424)
                                     163                                         132

                                                           (517)                (517)
      --------------     ---------------    -------------------      --------------- 

              54,629                (661)                  (473)             122,205
               6,788                                                           7,722
               1,437                                                           3,237
                 256                                                           1,952
              20,325                                                          20,325
             (23,015)
              (7,319)                                                         (7,319)
                                     269                                         227

                                                            494                  494
      --------------     ---------------    -------------------      ---------------

      $       53,101     $          (392)   $                21      $       148,843
      ==============     ===============    ===================      ===============
</TABLE>


          See accompanying notes to consolidated financial statements.





                                      F-7
<PAGE>   28


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES                  
      -------------------------------------------------------------------     
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                 Years Ended December 31, 1997, 1996, and 1995               
                            (Dollars in Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1997                  1996                   1995
                                                          ----                  ----                   ----
<S>                                                <C>                  <C>                  <C>
Increase (decrease) in cash and
   cash equivalents:
  Cash flows from operating activities:

     Net income                                    $        20,325       $        15,406       $        13,840
                                                   ---------------       ---------------       ---------------

     Adjustments to reconcile net
       income to net cash provided
      by operating activities:
       Provision for depreciation
        and net amortization                                 3,188                 2,689                 2,547
       Provision for credit losses                           2,826                 2,904                 1,713
       Credit for deferred income
        taxes                                                 (173)                 (867)                 (299)
       Net security gains                                     (194)                  (59)                  (34)
       (Gain) loss on sale of
         premises and equipment and
         other real estate                                    (231)                   (5)                  (49)
       Change in other assets                               (1,711)               (1,483)                 (195)
       Change in other
         liabilities                                           456                (1,004)                3,979
                                                   ---------------       ---------------       ---------------

          Total adjustments                                  4,161                 2,175                 7,662
                                                   ---------------       ---------------       ---------------

  Net cash provided by
       operating activities                                 24,486                17,581                21,502
                                                   ---------------       ---------------       ---------------

  Cash flows from investing
     activities:
     Net decrease in
       interest-bearing deposits
      in other financial
       institutions                                              2                   456                   487
     Proceeds from sale of
       securities available
       for sale                                              8,265                 7,188                14,116
     Proceeds from maturities
       of securities:
       Available for sale                                   40,278                55,309                32,608
       Held to maturity                                     11,403                 5,951                13,309
     Payment for purchases of
       securities:
       Available for sale                                  (75,420)              (30,899)              (37,299)
       Held to maturity                                    (22,610)              (26,841)              (19,085)
     Net increase in loans                                (139,674)             (135,253)              (57,997)
     Capital expenditures                                   (3,965)               (8,263)               (2,423)
     Proceeds from sale of
       premises and
      equipment                                                322                   284                    16
     Proceeds from sale of
       other real estate                                     2,595                   318                   713
     Acquisition of stock in
       subsidiary banks -
      Net of cash received                                  44,816                  (484)                  (23)
                                                   ---------------       ---------------       ---------------

  Net cash used in
     investing activities                                 (133,988)             (132,234)              (55,578)
                                                   ---------------       ---------------       ---------------  
</TABLE>





                                      F-8
<PAGE>   29


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES                  
      -------------------------------------------------------------------     
              CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 Years Ended December 31, 1997, 1996, and 1995               
                            (Dollars in Thousands)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                              1997                  1996                   1995
                                                              ----                  ----                   ----
<S>                                                <C>                   <C>                   <C>
  Cash flows from financing activities:
     Net increase in deposits                      $        90,272       $        86,948       $        67,795
     Net increase (decrease) in
       short-term borrowings                                 5,222                29,636                (8,369)
     Proceeds from other borrowings                         49,036                 8,720                 8,845
     Principal payments on other
      borrowings                                            (7,300)               (9,076)               (1,274)
     Proceeds from exercise of stock
       options                                                 227                   132                   106
     Purchase of shares of treasury
      common stock                                                                                        (845)
     Dividends paid                                         (7,319)               (5,424)               (4,308)
                                                   ---------------       ---------------       ---------------  

  Net cash provided by
     financing activities                                  130,138               110,936                61,950
                                                   ---------------       ---------------       ---------------

Net increase (decrease) in cash
     and cash equivalents                                   20,636                (3,717)               27,874
Cash and cash equivalents
     at beginning                                           72,692                76,409                48,535
                                                   ---------------       ---------------       ---------------

Cash and cash equivalents
     at end                                        $        93,328       $        72,692       $        76,409
                                                   ===============       ===============       ===============

Supplemental cash flow information:
---------------------------------- 

Cash paid during the year for:
  Interest                                         $        57,318       $        45,066       $        36,857
  Income taxes                                               9,783                 7,736                 6,619

Noncash investing and financing activities:
------------------------------------------ 

Loans transferred to other
  real estate                                      $         1,351       $         1,580       $           338
</TABLE>

See Note 3 for details of noncash consideration paid in acquisitions which
occurred in 1997, 1996, and 1995.

          See accompanying notes to consolidated financial statements.





                                      F-9
<PAGE>   30


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of F&M Bancorporation, Inc. (the
"Company") and its subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry.  Significant
accounting policies are summarized below.

Nature of Operations

F&M Bancorporation, Inc. is a Wisconsin multibank holding company.  Its
subsidiary banks provide a full range of commercial and retail banking services
to customers throughout Wisconsin.  Through its subsidiary banks, the Company
provides to its customers commercial, real estate, agricultural, and consumer
loans, as well as a variety of traditional deposit and trust products.

Principles of Consolidation

The consolidated financial statements include the accounts of F&M
Bancorporation, Inc. and all of its subsidiaries.  All significant intercompany
balances and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results may differ from these estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and non-interest-bearing deposits in correspondent banks and federal funds
sold.  Generally, federal funds are sold for one-day periods.

Investment Securities

The Company's investment securities are classified in two categories and
accounted for as follows:

  Securities available for sale - Securities available for sale consist of
  investment securities not classified as securities held to maturity.  These
  securities are stated at fair value.  Unrealized holding gains and losses,
  net of tax, on securities available for sale are reported as a net amount in
  a separate component of stockholders' equity until realized.





                                      F-10
<PAGE>   31


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  Securities held to maturity - Investment securities for which the Company has
  the positive intent and ability to hold to maturity are reported at cost,
  adjusted for amortization of premiums and accretion of discounts, which are
  recognized in interest income using the interest method over the period to
  maturity.

Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.

Interest and Fees on Loans

Interest on loans is credited to income as earned.  Interest income is not
accrued on loans where management has determined collection of such interest is
doubtful.  When a loan is placed on nonaccrual status, previously accrued but
unpaid interest deemed uncollectible is reversed and charged against current
income.  Loan-origination fees are credited to income when received, as
capitalization of the fees and related costs would not have a material effect
on the consolidated financial statements.

Allowance for Credit Losses

The allowance for credit losses includes specific allowances related to
commercial loans which have been judged to be impaired.  A loan is impaired
when, based on current information, it is probable that the Company will not
collect all amounts due in accordance with the contractual terms of the loan
agreement.  These specific allowances are based on discounted cash flows of
expected future payments using the loan's initial effective interest rate or
the fair value of the collateral if the loan is collateral dependent.

The Company continues to maintain a general allowance for credit losses for
loans not considered impaired.  The allowance for credit losses is maintained
at a level which management believes is adequate to provide for possible credit
losses.  Management periodically evaluates the adequacy of the allowance using
the Company's past credit loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
factors.  This evaluation is inherently subjective since it requires material
estimates that may be susceptible to significant change.

Mortgage Servicing Rights

The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues.  Impairment of mortgage
servicing rights is assessed based on the fair value of those rights.  Fair
values are estimated using discounted cash flows based on a current market
interest rate.  For purposes of measuring impairment, the rights are stratified
by rate in the quarter in which the related mortgage loans were sold.
        




                                      F-11
<PAGE>   32
                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Premises and Equipment

Premises and equipment are stated at cost.  Maintenance and repair costs are
charged to expense as incurred.  Gains or losses on disposition of premises and
equipment are reflected in income.  Depreciation is computed principally on the
straight-line method and is based on the estimated useful lives of the assets.

Goodwill

The excess of cost over the net assets of subsidiaries acquired is amortized
from the date of acquisition using the straight-line method over periods
ranging from ten to fifteen years.

Other Real Estate

Other real estate is carried at the lower of cost or fair value, less estimated
sales costs.

Income Taxes

Deferred income taxes have been provided under the liability method.  Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
current enacted tax rates which will be in effect when these differences are
expected to reverse.  Deferred tax expense (benefit) is the result of changes
in the deferred tax asset and liability.

Off-Balance-Sheet Financial Instruments

In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit.  Such financial instruments are recorded
in the consolidated financial statements when they become payable.





                                      F-12
<PAGE>   33

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Future Accounting Changes

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income."  This statement establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements.
This statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.  This statement requires that an enterprise display an
amount representing total comprehensive income for the period in a financial
statement, but does not require a specific format for that financial statement.
This statement also requires that an enterprise, a) classify items of other
comprehensive income by their nature in a financial statement and, b) display
the accumulated balance of other comprehensive income separately from retained
earnings and surplus in the equity section of the balance sheet.  The statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.  Management, at this time, cannot determine
the effect that adoption of this statement may have on the consolidated
financial statements of the Company as comprehensive income is dependent on the
amount and nature of assets and liabilities held which generate nonincome
changes to equity.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."  This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.  This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers.  It also amends SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the
special disclosure requirements for previously unconsolidated subsidiaries.
The statement is effective for fiscal years beginning after December 15, 1997.
In the initial year of application, comparative information for earlier years
is to be restated.  The statement is not expected to have an effect on the
financial position or operating results of the Company, but may require
additional disclosures in the consolidated financial statements.


NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLES
FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," in June 1996.  The Company adopted
the provisions of SFAS No. 125 effective January 1, 1997.  SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities.  The statement provides
guidelines for classification of a transfer as a sale.  The statement also
requires liabilities incurred or obtained by transferors as part of a transfer
of financial assets be initially recorded at fair value.  Subsequent to
acquisition, the servicing assets and liabilities are to be amortized over the
estimated net servicing period.





                                      F-13
<PAGE>   34


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3 - BUSINESS COMBINATIONS

On January 10, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of East Troy Bancshares, Inc. which owned 100% of State Bank
of East Troy (n/k/a F&M Bank - East Troy) in exchange for 483,992 shares (after
giving effect to the 10% stock dividend) of the Company's stock.

On February 27, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of Green County Bank (n/k/a F&M Bank - Brodhead) in exchange
for 201,264 shares (after giving effect to the 10% stock dividend) of the
Company's stock.

On August 12, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of Clear Lake Bancorp, Inc. which owned 98.17% of Landmark
Bank (n/k/a F&M Bank - Landmark) in exchange for 161,040 shares of the
Company's stock.  The minority shares of Landmark Bank were subsequently
acquired for cash.

The above transactions have been accounted for as poolings of interests.  The
transactions were not material to the Company's consolidated financial
statements; accordingly, previously reported financial information has not been
restated to include the results of these acquisitions.

On May 30, 1997, the Company acquired, through a merger, 100% of the
outstanding shares of Wisconsin Ban Corp., which owned 100% of Prairie City
Bank (n/k/a F&M Bank - Prairie du Chien), in exchange for 637,010 shares (after
giving effect to the 10% stock dividend) of the Company's stock.  In addition,
the Company redeemed the outstanding preferred stock of Wisconsin Ban Corp. for
cash of $350,871.  Cash of $2,634,825 was also used to pay the indebtedness of
Wisconsin Ban Corp. to its shareholders.

On August 14, 1997, the Company acquired, through a merger, 100% of the
outstanding shares of Citizens National Bancorp, Inc. which owned 100% of
Citizens National Bank of Darlington (n/k/a F&M Bank - Darlington, N.A.) in
exchange for 577,465 shares of the Company's stock.





                                      F-14
<PAGE>   35


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)

These transactions have been accounted for as poolings of interests.  All
financial information included in the consolidated financial statements and
notes thereto has been restated to include the results of Wisconsin Ban Corp.
and Citizens National Bancorp, Inc.  The following summarizes the separate
results of operations of the Company, Wisconsin Ban Corp., and Citizens
National Bancorp, Inc. (through the acquisition dates noted above) for the
years ended December 31:

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                        (Dollars in Thousands, Except Earnings Per Share)
  <S>                                              <C>                  <C>                  <C>     
  Net interest income:
     F&M Bancorporation, Inc.                      $        61,607       $        47,631       $        42,284
     Wisconsin Ban Corp.                                     1,396                 3,156                 3,190
     Citizens National Bancorp, Inc.                         1,699                 2,748                 2,692
                                                   ---------------       ---------------       ---------------

       Combined and restated                       $        64,702       $        53,535       $        48,166
                                                   ===============       ===============       ===============

  Net income:
     F&M Bancorporation, Inc.                      $        19,333       $        14,413       $        11,987
     Wisconsin Ban Corp.                                       470                   705                 1,087
     Citizens National Bancorp, Inc.                           522                   288                   766
                                                   ---------------       ---------------       ---------------

       Combined and restated                       $        20,325       $        15,406       $        13,840
                                                   ===============       ===============       ===============

  Earnings per share - Basic:
     F&M Bancorporation, Inc.                      $          2.12       $          1.88       $           1.60
                                                   ===============       ===============       ================
     Combined and restated                         $          2.09       $          1.73       $           1.59
                                                   ===============       ===============       ================

  Earnings per share - Diluted:
     F&M Bancorporation, Inc.                      $          2.11       $          1.87       $           1.59
                                                   ===============       ===============       ================
     Combined and restated                         $          2.08       $          1.73       $           1.59
                                                   ===============       ===============       ================
</TABLE>


On February 5, 1996, the Company acquired, through a merger, 100% of the
outstanding stock of Monycor Bancshares, Inc. ("Monycor") which owned 98.408%
of Monycor Bank of Superior (n/k/a F&M Bank - Superior) in exchange for 190,650
shares (after giving effect to the 10% stock dividends) of the Company's stock.
This transaction has been accounted for as a pooling of interests, although the
transaction was not material to the Company's financial statements and,
accordingly, prior financial statements were not restated.  The minority shares
of Monycor Bank of Superior were subsequently acquired for cash.





                                      F-15
<PAGE>   36

              

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)

On May 13, 1996, F&M Bank - Lakeland, a wholly owned subsidiary, acquired,
through a merger, 100% of the outstanding stock of Bradley Bank for cash of
$6,595,000.  Bradley Bank had total assets of $35,310,000 at the time of the
merger.  The operations of Bradley Bank were merged into F&M Bank - Lakeland.
This transaction has been accounted for as a purchase; accordingly, the
consolidated financial statements include the results of operations from the
acquisition date.  This transaction resulted in goodwill of $3,192,000.

On June 28, 1996, F&M Bancorporation, Inc. acquired, through a merger, 100% of
the outstanding stock of Community State Bank (n/k/a F&M Bank - Algoma) in
exchange for 465,489 shares of the Company's stock.  This transaction has been
accounted for as a pooling of interests.  All financial information included in
the consolidated financial statements and notes thereto has been restated to
include the results of Community State Bank.

On January 9, 1995, the Company acquired 100% of the outstanding stock of Union
State Bank (n/k/a F&M Bank - Waushara County) in an exchange offer.  Company
stock totaling 896,078 shares was issued in exchange for 99.97% of the
outstanding shares of Union State Bank.  The remaining shares of Union State
Bank stock were acquired for cash.  This transaction has been accounted for as
a pooling of interests.  All financial information included in the consolidated
financial statements and notes thereto has been restated to include the results
of Union State Bank.


NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the amount of $5,402,000 are restricted at
December 31, 1997, to meet the reserve requirements of the Federal Reserve
System.





                                      F-16
<PAGE>   37



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5 - INVESTMENT SECURITIES

The estimated fair value and amortized cost of investment securities at
December 31 are as follows:

<TABLE>
<CAPTION>
                                                               Gross              Gross
                                          Estimated         Unrealized         Unrealized         Amortized
                                          Fair Value           Gains             Losses              Cost      
                                       ---------------    ---------------    ---------------   ----------------
                                                               (Dollars in Thousands)
1997
----
<S>                                    <C>               <C>                <C>               <C>
Investment securities available
 for sale:
   U.S. Treasury securities and
    obligations of U.S.
    government corporations
      and agencies                     $        42,657    $            72    $            46   $         42,631
   Obligations of states
      and political
      subdivisions                              11,123                 35                 22             11,110
   Mortgage-related
      securities                               101,894                486                518            101,926
   Other securities                             22,729                 57                 30             22,702
                                       ---------------    ---------------    ---------------   ----------------

   Total investment securities
    available for sale                 $       178,403    $           650    $           616   $        178,369
                                       ===============    ===============    ===============   ================

Investment securities held
 to maturity - Obligations of
 states and political
 subdivisions                          $       133,040    $         4,808    $             8   $        128,240
                                       ===============    ===============    ===============   ================

1996
----

Investment securities available
 for sale:
   U.S. Treasury securities and
    obligations of U.S.
    government corporations
    and agencies                       $        50,305    $            73    $           230   $         50,462
   Obligations of states and
    political
    subdivisions                                23,674                 73                311             23,912
   Mortgage-related
    securities                                  64,995                381                759             65,373
   Other securities                             15,772                 31                 25             15,766
                                       ---------------    ---------------    ---------------   ----------------

   Total investment securities
    available for sale                 $       154,746    $           558    $         1,325   $        155,513
                                       ===============    ===============    ===============   ================

Investment securities held
 to maturity - Obligations of
 states and political
 subdivisions                          $        96,824    $         2,012    $           218   $        95,030
                                       ===============    ===============    ===============   ================
</TABLE>




                                      F-17
<PAGE>   38


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5 - INVESTMENT SECURITIES (CONTINUED)

Fair values of securities are estimates based on financial methods or prices
paid for similar securities.  It is possible interest rates could change
considerably resulting in a material change in the estimated fair value.

The estimated fair value and amortized cost of investment securities (available
for sale and held to maturity) at December 31, 1997, by contractual maturity,
are shown below.  Contractual maturities will differ from expected maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.

<TABLE>
<CAPTION>
                                         Securities Available for Sale          Securities Held to Maturity
                                       ---------------------------------     ---------------------------------
                                          Estimated          Amortized         Estimated           Amortized
                                          Fair Value           Cost            Fair Value             Cost      
                                       ---------------    ---------------    ---------------   ----------------
                                                               (Dollars in Thousands)
   <S>                                  <C>               <C>             <C>                 <C>
   Due in three months or less          $        16,852    $    16,883       $       1,113    $       1,111
   Due after three months
      through one year                           15,225         15,246               6,628            6,579
   Due after one year
      through five years                         36,476         36,428              29,313           28,537
   Due after five years
      through ten years                           3,008          2,996              38,723           37,229
   Due after ten years                            4,948          4,890              57,263           54,784
                                      -----------------   ------------       -------------    -------------

                                                 76,509         76,443             133,040          128,240

   Mortgage-related securities                  101,894        101,926                                     
                                      -----------------   ------------       -------------    -------------

   Total                              $         178,403   $    178,369       $     133,040    $     128,240
                                      =================   ============       =============    =============
</TABLE>

Following is a summary of the proceeds from sales of investment securities
available for sale as well as gross gains and losses for the years ended
December 31:

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                                      (Dollars in Thousands)
   <S>                                            <C>                   <C>                 <C>
   Proceeds from sales of investment
    securities                                     $         8,265       $         7,188       $        14,116
   Gross gains on sales                                        206                   151                   121
   Gross losses on sales                                        12                    92                    87
</TABLE>

The estimated fair value and amortized cost of investment securities pledged to
secure public deposits, short-term borrowings, and for other purposes required
by law were $38,049,000 and $38,139,000, respectively, as of December 31, 1997.





                                      F-18
<PAGE>   39

      

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5 - INVESTMENT SECURITIES (CONTINUED)

The obligations of states and political subdivisions are generally purchased
with the intent to hold to maturity.  A significant portion of these securities
are rated by Moody's with ratings ranging from A to AAA.  For those securities
not rated, market values are obtained from brokerage services utilized by the
Company.  At December 31, 1997, the total carrying value of nonrated
obligations of states and political subdivisions was $34,170,000.


NOTE 6 - LOANS

The composition of loans at December 31 follows:

<TABLE>
<CAPTION>

                                                                               1997                  1996
                                                                               ----                  ----
                                                                             (Dollars in Thousands)
   <S>                                                                   <C>                   <C>     
   Commercial, industrial, and financial                                 $       244,629       $       188,952
   Agricultural                                                                   79,351                80,245
   Real estate:
      Construction                                                                38,929                36,822
      Mortgage                                                                   748,874               596,691
   Installment                                                                    86,112                67,844
                                                                         ---------------       ---------------

   Total loans                                                           $     1,197,895       $       970,554
                                                                         ===============       ===============
</TABLE>

The aggregate amount of nonperforming loans was $10,998,000 and $13,003,000 at
December 31, 1997 and 1996, respectively.  Nonperforming loans are those which
are contractually past due 90 days or more as to interest or principal
payments, those loans on a nonaccrual status, or loans the terms of which have
been renegotiated to provide a reduction or deferral of interest or principal.
If nonaccrual and renegotiated loans had been current, or not troubled,
$1,085,000, $886,000, and $632,000 of interest income would have been recorded
for the years ended December 31, 1997, 1996, and 1995, respectively.  Interest
income actually recorded on these loans was $369,000, $251,000, and $213,000
for the years ended December 31, 1997, 1996, and 1995, respectively.

The recorded investment in loans considered to be impaired was $5,603,000 and
$7,483,000 of which $4,053,000 and $5,144,000 was on a nonaccrual basis at
December 31, 1997 and 1996, respectively.  The related allowance for credit
losses on impaired loans was $1,303,000 and $1,207,000 as of December 31, 1997
and 1996, respectively.  The average recorded investment in impaired loans was
$6,657,000 and $5,923,000 during 1997 and 1996, respectively.  The Company
recognized interest income on those impaired loans of $215,000, $392,000, and
$364,000 which included $197,000, $378,000, and $356,000 of interest income
recognized using the cash basis method of income recognition for the years ended
December 31, 1997, 1996, and 1995, respectively.
        




                                      F-19
<PAGE>   40


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6 - LOANS (CONTINUED)

The subsidiary banks in the ordinary course of banking business grant loans to
the Company's executive officers and directors including their families and
firms in which they are principal owners.

Substantially all loans to executive officers and directors were made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.  Activity
in such loans during 1997 is summarized below:

<TABLE>
<CAPTION>
                                                                      (Dollars in Thousands)
   <S>                                                                  <C>
   Loans outstanding, January 1, 1997                                    $        19,045
   New loans                                                                      13,443
   Repayment                                                                     (12,626)
                                                                         --------------- 

   Loans outstanding, December 31, 1997                                  $        19,862
                                                                         ===============
</TABLE>

An analysis of the allowance for credit losses for the years ended December 31
follows:

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                                      (Dollars in Thousands)
   <S>                                             <C>                  <C>                   <C>     
   Balance, January 1                              $        12,319       $        10,060       $         9,255
   Provision for credit losses                               2,826                 2,904                 1,713
   Allowance for credit losses of
    banks acquired at date of
    acquisition                                              1,329                   587
   Recoveries on loans                                         363                   281                   301
   Loans charged off                                        (1,747)               (1,513)               (1,209)
                                                   ---------------       ---------------       ---------------  

   Balance, December 31                            $        15,090       $        12,319       $        10,060
                                                   ===============       ===============       ===============
</TABLE>

The financial statements do not include loans serviced for others, which
totaled $134,491,000 at December 31, 1997.


NOTE 7 - MORTGAGE SERVICING RIGHTS

An analysis of changes in mortgage servicing rights for the years ended
December 31 follows:

<TABLE>
<CAPTION>
                                                         1997                  1996
                                                         ----                  ----
                                                            (Dollars in Thousands)
   <S>                                             <C>                  <C>         
   Balance, January 1                              $           260       $
   Capitalized amounts                                         599                   297
   Less - Amortization                                         128                    37
                                                   ---------------       ---------------

   Balance, December 31                            $           731       $           260
                                                   ===============       ===============
</TABLE>


                                      F-20
<PAGE>   41



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 7 - MORTGAGE SERVICING RIGHTS (CONTINUED)

No impairment of mortgage servicing rights existed at December 31, 1997 and
1996; therefore, no valuation allowance was recorded.

The carrying value of the mortgage servicing rights is included with other
assets and approximates fair market value at December 31, 1997 and 1996.


NOTE 8 - PREMISES AND EQUIPMENT

An analysis of premises and equipment at December 31 follows:

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----
                                                                                   (Dollars in Thousands)
   <S>                                                                  <C>                   <C>
   Land                                                                  $         4,839       $         5,079
   Buildings and improvements                                                     31,442                26,545
   Furniture and equipment                                                        19,356                17,963
   Construction in progress                                                          211                   703
                                                                         ---------------       ---------------

   Totals                                                                         55,848                50,290
   Less - Accumulated depreciation and
      amortization                                                                22,990                20,667
                                                                         ---------------       ---------------

   Net book value                                                        $        32,858       $        29,623
                                                                         ===============       ===============
</TABLE>

Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $2,623,000 in 1997, $2,145,000 in 1996, and $1,926,000 in
1995.


NOTE 9 - OTHER REAL ESTATE

Included in other assets is other real estate totaling $917,000 and $1,842,000
at December 31, 1997 and 1996, respectively.  There is no allowance for losses
on other real estate.  Other real estate expenses totaled $156,000, $140,000,
and $133,000 for 1997, 1996, and 1995, respectively.





                                      F-21
<PAGE>   42


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10 - DEPOSITS

The distribution of deposits at December 31 is as follows:

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----
                                                                                (Dollars in Thousands)
   <S>                                                                  <C>                   <C>
   Non-interest-bearing demand deposits                                 $        180,312       $        150,849
   Interest-bearing demand deposits                                              112,843                100,998
   Savings deposits                                                              175,528                150,401
   Money market deposits                                                         239,450                166,649
   Time deposits                                                                 665,239                571,474
                                                                         ---------------       ----------------

   Total deposits                                                        $     1,373,372       $      1,140,371
                                                                         ===============       ================
</TABLE>

Time deposits of $100,000 or more were $149,642,000 and $99,859,000 at December
31, 1997 and 1996, respectively.  Interest expense on time deposits of $100,000
or more was $7,359,000, $5,407,000, and $4,349,000 for the years ended December
31, 1997, 1996, and 1995, respectively.


NOTE 11 - SHORT-TERM BORROWINGS

The short-term borrowings of $47,685,000 and $42,263,000 at December 31, 1997
and 1996, respectively, consisted of federal funds purchased and securities
sold under repurchase agreements.

The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----
                                                                                (Dollars in Thousands)

   <S>                                                                   <C>                 <C>
   As of year-end - Weighted average rate                                           6.62%                  6.37%

   For the year:
      Highest month-end balance                                          $        79,021       $         45,237
      Daily average balance                                                       56,678                 33,833
      Weighted average rate                                                         5.80%                  5.47%

</TABLE>




                                      F-22
<PAGE>   43

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12 - OTHER BORROWINGS

Other borrowings at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                           1997                  1996
                                                                           ----                  ----
                                                                                (Dollars in Thousands)
   <S>                                                          <C>                   <C>
   Federal Home Loan Bank advances (a)                           $            60,929   $            18,177
   Note payable to former stockholder (b)                                                               17
                                                                 -------------------   -------------------

   Totals                                                        $            60,929   $            18,194
                                                                 ===================   ===================
</TABLE>

(a)   As members of the Federal Home Loan Bank (FHLB) system, individual bank
      subsidiaries may utilize various borrowing alternatives, secured by
      pledges of mortgage loans (totaling $276,637,000) and FHLB stock.  At
      December 31, 1997, the subsidiaries' outstanding advances had original
      maturities ranging from five months to eight years and fixed and
      adjustable rates ranging from 5.26% to 7.73%.  Interest is payable
      monthly.

      The scheduled principal maturities of these advances at December 31,
      1997, are summarized as follows:

<TABLE>
<CAPTION>
                                                (Dollars in Thousands)
           <S>                                     <C>     
           1998                                    $        30,200
           1999                                              1,229
           2000                                             18,200
           2001                                                200
           Thereafter                                       11,100
                                                   ---------------

                                                   $        60,929
                                                   ===============
</TABLE>

(b)   Note payable was due January 1, 1997.  The note was unsecured.





                                      F-23
<PAGE>   44

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - INCOME TAXES

The components of the provision for income taxes are as follows for the years
ended December 31:

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                                      (Dollars in Thousands)
   <S>                                             <C>                  <C>                  <C>       
   Current tax expense:
      Federal                                      $         7,481       $         6,418       $         5,376
      State                                                  1,703                 1,441                 1,032
                                                   ---------------       ---------------       ---------------

   Total current                                             9,184                 7,859                 6,408
                                                   ---------------       ---------------       ---------------

   Deferred tax credit                                        (171)                 (883)                 (327)
                                                   ---------------       ---------------       ---------------

   Subtotals                                                 9,013                 6,976                 6,081
   Change in valuation
      allowance                                                 (2)                   16                    28
                                                   ---------------       ---------------       ---------------

   Total provision for
      income taxes                                 $         9,011       $         6,992       $         6,109
                                                   ===============       ===============       ===============
</TABLE>

Included in the total provision for income taxes is expense of $70,000,
$20,000, and $12,000 for the years ended December 31, 1997, 1996, and 1995,
respectively, related to security transactions.





                                      F-24
<PAGE>   45

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - INCOME TAXES (CONTINUED)

As of December 31, 1997 and 1996, deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities.  The major components of deferred tax
assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----
                                                                                (Dollars in Thousands)
   <S>                                                                  <C>                   <C>
   Deferred tax assets:
      Allowance for credit losses                                        $         5,305       $         3,910
      Deferred compensation                                                          223                   232
      Nonperforming assets                                                                                 528
      Net operating losses                                                         1,183                 1,010
      Pension                                                                        233                   272
      Other                                                                          196                   217
      Unrealized loss on securities available for sale                                                     294
                                                                         ---------------       ---------------

                                                                                   7,140                 6,463

      Valuation allowance                                                           (864)                 (756)
                                                                         ---------------       ---------------- 

      Deferred tax assets                                                          6,276                 5,707
                                                                         ---------------       ---------------

   Deferred tax liabilities:
      Depreciation                                                                (1,829)               (1,571)
      Mortgage servicing rights                                                     (249)                 (102)
      Other                                                                          (52)                  (37)
      Unrealized gain on securities
         available for sale                                                          (13)                      
                                                                         ---------------       ----------------

      Deferred tax liabilities                                                    (2,143)               (1,710)
                                                                         ---------------       ---------------  

   Net deferred tax assets                                               $         4,133       $         3,997
                                                                         ===============       ===============
</TABLE>

The change in net deferred assets in 1997 includes changes related to
acquisitions and $308,000 of tax expense allocated directly to stockholders'
equity for unrealized gains on securities available for sale.

The Company and one of its subsidiaries have separate Wisconsin net operating
loss carryforwards totaling $16,662,000 at December 31, 1997.  These net
operating loss carryforwards begin to expire in 1998.  Since the Company and
these subsidiaries are required to file separate returns for Wisconsin and they
are not expected to generate taxable income, no tax benefit from these losses
is anticipated.  The valuation allowance represents the benefit of
these losses, which is not expected to be realized.





                                      F-25


<PAGE>   46

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - INCOME TAXES (CONTINUED)

One subsidiary has a federal net operating loss carryforward of $382,000 and
two other subsidiaries have Wisconsin net operating loss carryforwards of
$3,632,000.  These carryforwards occurred prior to the acquisition of these
subsidiaries and, therefore, can only be used to offset future taxable income
of these subsidiaries.  The federal carryforwards begin to expire in 2001 and
the Wisconsin carryforwards begin to expire in 2006.  Based on the annual usage
limitations, it is expected these net operating losses will be utilized.

A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:

<TABLE>
<CAPTION>
                                       1997                          1996                           1995          
                          ---------------------------   ----------------------------    ---------------------------
                                                                   
                                                                   
                                              % of                          % of                           % of
                                             Pretax                        Pretax                         Pretax
                             Amount          Income         Amount         Income         Amount          Income  
                          -------------    ----------   --------------   ----------    -------------    ----------
                                                          (Dollars in Thousands)
<S>                           <C>            <C>          <C>            <C>         <C>                <C>
Tax expense at
 statutory
 rate                             9,974         34.0       $  7,615        34.0       $     6,783            34.0
Increase (decrease)
 in taxes resulting
 from:
   Tax-exempt
      interest                   (2,304)        (7.9)        (1,875)       (8.4)           (1,529)           (7.7)
   State income
      taxes                       1,066          3.6            852         3.8               741             3.7
   Goodwill
    amortization                    195          0.7            178         0.8               135             0.7
   Other                             80          0.3            222         1.0               (21)           (0.1)
                               --------       ------       --------       -----       -----------          ------
Provision for income
 taxes                          $ 9,011         30.7       $  6,992        31.2       $     6,109            30.6
                               ========       ======       ========       =====       ===========          ======
</TABLE>


NOTE 14 - RETIREMENT PLANS

The Company sponsors a defined contribution 401(k) retirement savings plan
covering substantially all employees.  Employees are allowed to make voluntary
contributions to the plan.  The Company makes a matching contribution which is
based on the Company's return on equity.  The Company may also make a
discretionary profit-sharing contribution.





                                      F-26
<PAGE>   47



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14 - RETIREMENT PLANS (CONTINUED)

F&M Bank - Lakeland continues to maintain an Employee Stock Ownership Plan
(ESOP), which was established prior to the Company's acquisition of this bank.
The assets of this plan, which include 185,353 shares of the Company stock,
remain frozen and have not been transferred into the Company's 401(k)
retirement savings plan as of December 31, 1997.

F&M Bank - East Troy, F&M Bank - Brodhead, F&M Bank - Prairie du Chien, F&M
Bank - Landmark, and F&M Bank - Darlington, N.A. sponsor defined contribution
401(k) retirement savings plans which cover substantially all of their
respective employees.  The contributions to these plans for 1997 were
consistent with those of the Company's 401(k) retirement savings plan discussed
above.  It is expected that the assets of these plans will be transferred into
the Company's plan during 1998.

Retirement plan contribution expense charged to operations for all plans
(excluding the defined benefit pension plan discussed below) totaled
$1,392,000, $1,092,000, and $1,035,000 for 1997, 1996, and 1995, respectively.

F&M Bank - Waushara County sponsored a defined benefit plan covering
substantially all employees of the former Union State Bank.  Effective August
27, 1994, the plan was frozen resulting in a plan curtailment.  Subsequent to
the curtailment, plan participants will not accrue any additional benefit for
service.  The Bank's funding policy is to make contributions on an annual basis
to the extent allowed for tax purposes.  The following table sets forth F&M
Bank - Waushara County's defined benefit pension plan funded status and amounts
reflected in the accompanying consolidated balance sheets at December 31:

<TABLE>
<CAPTION>
                                                                               1997                  1996
                                                                               ----                  ----
                                                                                (Dollars in Thousands)
   <S>                                                                  <C>                   <C>
   Actuarial present value of
      benefit obligation                                                 $        (2,109)      $        (2,227)
   Plan assets at fair value                                                       1,398                 1,464
                                                                         ---------------       ---------------

   Accrued pension cost recognized
      in the consolidated
       balance sheets                                                    $          (711)      $          (763)
                                                                         ===============       =============== 


</TABLE>



                                      F-27
<PAGE>   48


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14 - RETIREMENT PLANS (CONTINUED)

Net pension cost included the following components:        
<TABLE>
<CAPTION>

                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                                      (Dollars in Thousands)
   <S>                                             <C>                 <C>                  <C>
   Interest cost on
      projected benefit
     obligation                                    $           126       $           128       $           161
   Net amortization and
      deferral                                                 (21)                  (12)                  (36)
                                                   ---------------       ---------------       ---------------  

   Total periodic pension cost                                 105                   116                   125
   Less - Actual return on
      plan assets                                               82                    90                   105
                                                   ---------------       ---------------       ---------------

   Net periodic pension cost                       $            23       $            26       $            20
                                                   ===============       ===============       ===============
</TABLE>

The following assumptions were used in determining the projected benefit
obligation:
<TABLE>
<CAPTION>

                                                             1997                  1996                  1995
                                                             ----                  ----                  ----
   <S>                                                       <C>                   <C>                    <C>
   Discount rate                                              6.0%                  6.0%                   6.0%
   Rates of increase in
      compensation levels                                     0.0%                  0.0%                   0.0%
   Expected long-term rate of
      return on assets                                        7.5%                  7.5%                   7.5%
</TABLE>

The plan assets consist primarily of insurance investment contracts, U.S.
government securities, and short-term mutual funds.





                                      F-28
<PAGE>   49


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15 - STOCKHOLDERS' EQUITY

Earnings per share are based upon the weighted average number of shares
outstanding, restated to reflect the 10% stock dividends paid to stockholders
on June 9, 1997 and June 10, 1996.  The following shows the computation of the
basic and diluted earnings per share for the years ended December 31:

<TABLE>
<CAPTION>
                                                                             Weighted
                                                                             Average
                                                                            Number of            Earnings Per
                                                      Net Income              Shares                Share      
                                                   ---------------       ---------------       ----------------
                                                    (In Thousands)
<S>                                               <C>                   <C>                   <C>
1997
----
Earnings per share - Basic                         $        20,325             9,745,459       $           2.09
                                                                                               ================
Effect of stock options - Net                                                     48,025       
                                                   ---------------       ---------------

Earnings per share - Diluted                       $        20,325             9,793,484       $           2.08
                                                   ===============       ================      ================

1996
----
Earnings per share - Basic                         $        15,406             8,890,517       $           1.73
                                                                                               ================
Effect of stock options - Net                                                     30,007       
                                                   ---------------       ---------------

Earnings per share - Diluted                       $        15,406             8,920,524       $           1.73
                                                   ===============       ================      ================

1995
----
Earnings per share - Basic                         $        13,840             8,694,464       $           1.59
                                                                                               ================
Effect of stock options - Net                                                     18,586       
                                                   ---------------       ---------------

Earnings per share - Diluted                       $        13,840             8,713,050       $           1.59
                                                   ===============       ================      ================
</TABLE>

On June 9, 1997, the Company issued 821,875 shares of common stock as a 10%
stock dividend.  These shares had a value of $23,015,000 at the date of
issuance.  All references to the number of shares of common stock in the
footnotes have been restated for the stock dividend; however, on the financial
statements, these shares are recognized as having been issued in 1997.

On June 10, 1996, the Company issued 637,880 shares of common stock as a 10%
stock dividend.  These shares had a value of $16,538,000 at the date of
issuance.  All references to the number of shares of common stock in the
footnotes have been restated for the stock dividend; however, on the financial
statements, these shares are recognized as having been issued in 1996.





                                      F-29
<PAGE>   50


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)

The Company is subject to various regulatory capital requirements administered
by the federal banking agencies.  Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.  Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.  The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets.  Management believes, as of December 31, 1997, that
the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 1997, the most recent notifications from the supervisory
agencies categorized all of the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized as well
capitalized, the banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
There are no conditions or events since those notifications that management
believes have changed the subsidiary banks' categories.

The Company's consolidated actual and minimum regulatory capital amounts (in
thousands) and ratios, as of December 31, are presented in the following table:

<TABLE>
<CAPTION>
                                                                      1997                            
                                            ----------------------------------------------------
                                                                                    For Capital
                                              Actual Adequacy Purposes               
                                            ----------------------------------------
                                              Amount        Ratio      Amount         Ratio   
                                            -----------     -----      -------        -----
<S>                                         <C>            <C>       <C>              <C>
Total capital (to                                                                  
   risk-weighted assets)                    $  154,163      12.6%    >$  98,050        >8.0%
                                                                     -                 -
Tier I capital (to                                                                 
   risk-weighted assets)                    $  139,073      11.4%    >$  49,025        >4.0%
                                                                     -                 -
Tier I capital (to                                                                 
   average assets)                          $  139,073       8.7%    >$  64,322        >4.0%
                                                                     -                 -
</TABLE>




                                      F-30
<PAGE>   51


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                   1996                            
                                            ----------------------------------------------------------
                                                                                       For Capital
                                                 Actual Adequacy Purposes               
                                            ---------------------------------
                                               Amount        Ratio         Amount             Ratio  
                                            -----------    ----------   ---------------   ---------
<S>                                         <C>            <C>         <C>                <C>
Total capital (to                                         
   risk-weighted assets)                    $  128,371       13.0%       >$  78,984          >8.0%
                                                                         -                   -
Tier I capital (to                                                                       
   risk-weighted assets)                    $  116,052       11.8%       >$  39,492          >4.0%
                                                                         -                   -
Tier I capital (to                                                                       
   average assets)                          $  116,052        8.9%       >$  51,982          >4.0%
                                                                         -                   -
</TABLE>

Banking subsidiaries are restricted by banking regulations from making dividend
distributions above prescribed amounts.  At December 31, 1997, the Company's
subsidiaries could have paid $45,483,000 of additional dividends to the Company
without prior regulatory approval.


NOTE 16 - STOCK OPTION PLANS

The Company sponsors two stock option plans, one for officers and employees
(the "Executive Plan") and one for nonemployee directors (the "Directors'
Plan").  Options under the Executive Plan are granted at the discretion of the
stock option committee of the Company's Board of Directors.  Options under the
Directors' Plan are granted automatically each year at a date and in an amount
specified in the Directors' Plan.  Under both plans, options to purchase shares
of the Company's common stock are granted at a price equal to the market price
of the stock at the date of grant.  A total of 181,500 shares were made
available for grant under these plans.

The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology.  The following assumptions were made in estimating
fair value for options granted for the years ended December 31:

<TABLE>
<CAPTION>
                                                             1997                  1996                  1995
                                                             ----                  ----                  ----
   <S>                                                      <C>                   <C>                   <C>
   Dividend yield                                            2.00%                 2.76%                 2.76%
   Risk-free interest rate                                   5.46%                 5.13%                 5.13%
   Weighted average expected
      life (years)                                            4.4                   4.3                   4.3
   Expected volatility                                      37.20%                23.44%                23.44%

</TABLE>

The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $5.75, $2.70, and $2.10 per share
for options granted in 1997, 1996, and 1995, respectively.
        




                                      F-31
<PAGE>   52


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
   
NOTE 16 - STOCK OPTION PLANS (CONTINUED)

No compensation cost has been recognized for the plans.  Had compensation cost
been determined on the basis of fair value, net income and earnings per share
would have been reduced as follows:

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
                                                   (Dollars in Thousands, Except Earnings Per Share)
   <S>                                             <C>                   <C>                  <C>     
   Net income:
   ---------- 

      As reported                                  $        20,325       $        15,406       $         13,840
                                                   ===============       ===============       ================

      Pro forma                                    $        20,181       $        15,350       $         13,794
                                                   ===============       ===============       ================

   Earnings per share - Basic:
   -------------------------- 

      As reported                                  $          2.09       $          1.73       $           1.59
                                                   ===============       ===============       ================

      Pro forma                                    $          2.07       $          1.73       $           1.59
                                                   ===============       ===============       ================

   Earnings per share - Diluted:
   ---------------------------- 

      As reported                                  $          2.08       $          1.73       $           1.59
                                                   ===============       ===============       ================

      Pro forma                                    $          2.06       $          1.72       $           1.58
                                                   ===============       ===============       ================

</TABLE>

Following is a summary of stock option transactions for the years ended
December 31:

<TABLE>
<CAPTION>
                                                                     Number of Shares                                   
                                                   ------------------------------------------------------------
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
<S>                                                <C>                   <C>                   <C>
Outstanding at beginning of
   year                                                     77,223                54,954                42,740
Granted during the year                                     25,135                27,969                23,714
Exercised during the year (at
   prices ranging from
   $16.53 to $26.82 per share)                             (13,970)               (5,700)               (4,500)
Canceled during the year                                                                                (7,000)
                                                   ---------------       ---------------       ---------------  

Outstanding at end of year                                  88,388                77,223                54,954
                                                   ===============       ===============       ===============

Weighted average exercise
   price per share
   granted during the year                         $         26.98       $         21.71       $         17.63
                                                   ===============       ===============       ===============

Available for grant at
   end of year                                              68,942                94,077                122,046
                                                   ===============       ===============       ================
</TABLE>

Options granted under these plans expire ten years after the
grant.





                                      F-32
<PAGE>   53


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 16 - STOCK OPTION PLANS (CONTINUED)

Following is a summary of the options outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                                     Average              Weighted
                                                                    Remaining              Average
           Exercise                                                Contractual            Exercise
           Price Range                          Number            Life - Years              Price     
           ----------------                 ------------         -------------          ------------
<S>                                         <C>                  <C>                   <C>
           $16.53 to $17.77                        40,344                6.7            $      17.17
           $21.65 to $21.90                        25,109                8.1                   21.72
           $26.82 to $27.39                        22,935                9.1                   27.00
                                            -------------         ----------            ------------

Totals                                             88,388                7.7            $      21.01
                                            =============          =========            ============
</TABLE>

All options outstanding at December 31, 1997, were exercisable.

In connection with an acquisition in 1994, an unexercised option under a
separate stock option plan was converted into an option for 15,958 shares of
the Company's common stock with an exercise price of $7.73 per share.  During
1997, 1996, and 1995, the option was exercised for 1,500, 2,000, and 1,500
shares, respectively.  The option remains outstanding for 7,158 shares as of
December 31, 1997.  The option expires December 15, 2002.


NOTE 17 - ADVERTISING COSTS

Advertising costs are expensed as incurred (or the first time advertising takes
place).  Advertising expense for 1997, 1996, and 1995 was $1,095,000, $768,000,
and $688,000, respectively.


NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

Financial Instruments With Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.  Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.





                                      F-33
<PAGE>   54



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)

The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.  These
commitments at December 31, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
                                                           1997               1996
                                                           ----               ----
                                                           (Dollars in Thousands)
<S>                                                    <C>             <C>
   Commitments to extend credit                            120,740       $   92,117
   Standby letters of credit                                 2,271            5,728
   Credit card commitments                                  24,991           20,189
                                                         ---------       ----------

                                                         $ 148,002       $  118,034
                                                         =========       ==========
</TABLE>

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

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.  Those guarantees are
primarily issued to support public and private borrowing arrangements.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.  The commitments are
structured to allow for 100% collateralization on all standby letters of
credit.

Credit card commitments are commitments on credit cards issued by the Company's
subsidiaries and serviced by other companies.  These commitments are unsecured.

Contingencies

In the normal course of business, the Company is involved in
various legal proceedings.  In the opinion of management, any liability
resulting from such proceedings would not have a material adverse effect on the
consolidated financial statements.





                                      F-34
<PAGE>   55



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)

Concentration of Credit Risk

The Company's subsidiary banks grant residential, commercial, agricultural, and
consumer loans throughout Wisconsin.  Due to the diversity of locations, the
ability of debtors to honor their contracts is not tied to any particular
economic sector.


NOTE 19 - PENDING ACQUISITIONS

On June 10, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Sentry Bancorp.,
Inc., in exchange for cash.   Sentry Bancorp., Inc. owns 100% of the stock of
Cannon Valley Bank.  This transaction has received regulatory and stockholder
approval.  The transaction is expected to be completed in the first quarter of
1998.

On September 30, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Bank of South Wayne
in exchange for Company stock.  This transaction has received stockholder
approval and is subject to regulatory approval.  The transaction is expected to
be completed in the first quarter of 1998.

On December 1, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of BancSecurity
Corporation, Inc. in exchange for Company stock.  BancSecurity Corporation,
Inc. owns 100% of Security Bank, Story County Bank and Trust, and Security Bank
Jasper-Poweshiek.  This transaction is subject to regulatory and stockholder
approval.  The transaction is expected to be completed in the second quarter of
1998.

On December 31, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Financial
Management Services of Jefferson, Inc. in exchange for Company stock.
Financial Management Services of Jefferson, Inc. owns 100% of Farmers &
Merchants Bank.  This transaction is subject to regulatory and stockholder
approval.  The transaction is expected to be completed in the second quarter of
1998.





                                      F-35
<PAGE>   56




                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments:

   Cash and cash equivalents - The carrying values approximate the fair values
   for these assets.

   Investment securities - Fair values are based on quoted market prices, where
   available.  If a quoted market price is not available, fair value is
   estimated using quoted market prices for similar securities.
   Interest-bearing deposits in other financial institutions are included in
   this category.

   Loans - Fair values are estimated for portfolios of loans with similar
   financial characteristics.  Loans are segregated by type such as commercial,
   residential mortgage, and other consumer.  The fair value of loans is
   calculated by discounting scheduled cash flows through the estimated
   maturity using estimated market discount rates that reflect the credit and
   interest rate risk inherent in the loan.  The estimate of maturity is based
   on the Company's repayment schedules for each loan classification.

   The methodology in determining fair value of nonaccrual loans is to average
   them into the blended interest rate at 0% interest.  This has the effect of
   decreasing the carrying amount below the risk-free rate amount and therefore
   discounts the estimated fair value.

   Impaired loans are measured at the estimated fair value of the expected
   future cash flows at the loan's effective interest rate or the fair value of
   the collateral for loans which are collateral dependent.  Therefore, the
   carrying values of impaired loans approximate the estimated fair values for
   these assets.

   Deposit liabilities - The fair value of deposits with no stated maturity,
   such as non-interest-bearing demand deposits, savings, NOW accounts, money
   market, and checking accounts, is equal to the amount payable on demand at
   the reporting date.  The fair value of certificates of deposit is based on
   the discounted value of contractual cash flows.  The discount rate reflects
   the credit quality and operating expense factors of the Company.

   Short-term and other borrowings - Rates currently available for debt with
   similar terms and remaining maturities are used to estimate the fair value
   of existing debt.  The fair value of borrowed funds due on demand is the
   amount payable at the reporting date.

   Off-balance-sheet instruments - The fair value of commitments is estimated
   using the fees currently charged to enter into similar agreements, taking
   into account the remaining terms of the agreements, the current interest
   rates, and the present creditworthiness of the counterparties.  Since this
   amount is immaterial, no amounts for fair value are presented.





                                      F-36
<PAGE>   57



                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The following table presents information for financial instruments at December
31:


<TABLE>
<CAPTION>
                                               1997                                        1996                
                             -------------------------------------       --------------------------------------
                                 Carrying             Estimated              Carrying             Estimated
                                  Amount              Fair Value              Amount              Fair Value   
                             ---------------       ---------------       ---------------       ----------------
                                                          (Dollars in Thousands)

<S>                         <C>                  <C>                    <C>                   <C>
Financial assets:
   Cash and cash
    equivalents              $        93,328       $        93,328       $        72,692       $         72,692
   Investment
    securities                       306,837               311,637               249,972                251,766

   Total loans                     1,197,895                                     970,554
   Allowance for
    credit losses                    (15,090)                                    (12,319)                  
                             ---------------       ---------------       ---------------       ----------------

      Net loans                    1,182,805             1,220,834               958,235                982,338
                             ---------------       ---------------       ---------------       ----------------

Total financial
   assets                    $     1,582,970       $     1,625,799       $     1,280,899       $      1,306,796
                             ===============       ===============       ===============       ================

Financial liabilities:
   Deposits                  $     1,373,372       $     1,372,821       $     1,140,371       $      1,140,389
   Short-term and
    other borrowings                 108,614               108,567                60,457                 60,490
                             ---------------       ---------------       ---------------       ----------------

Total financial
   liabilities               $     1,481,986       $     1,481,388       $     1,200,828       $      1,200,879
                             ===============       ===============       ===============       ================
</TABLE>

Limitations -  Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instrument. 
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument.  Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.  These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. 
Changes in assumptions could significantly affect the estimates.  Fair value
estimates are based on existing on- and off-balance-sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments. 
Significant assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, other assets, and other
liabilities.  In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
        


                                      F-37
<PAGE>   58


   

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS

                                 BALANCE SHEETS
                           December 31, 1997 and 1996
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                              ASSETS

                                                                               1997                  1996
                                                                               ----                  ----
<S>                                                                     <C>                   <C>

Cash and cash equivalents                                                $         7,087       $         8,348
Investment securities available for sale -
 Stated at fair value                                                                214                   473

Investment in subsidiaries                                                       139,553               115,085
Loans                                                                                957                   384
Premises and equipment - Net                                                       1,393                 1,550
Other assets                                                                         170                   230
                                                                         ---------------       ---------------


TOTAL ASSETS                                                             $       149,374       $       126,070
                                                                         ===============       ===============


                                               LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Accrued expenses                                                      $           531       $         1,087
   Other borrowings                                                                                      2,778
                                                                         ---------------       ---------------

   Total liabilities                                                                 531                 3,865

Total stockholders' equity                                                       148,843               122,205
                                                                         ---------------       ---------------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $       149,374       $       126,070
                                                                         ===============       ===============

</TABLE>




                                      F-38
<PAGE>   59

   

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)

                             STATEMENTS OF INCOME
                 Years Ended December 31, 1997, 1996, and 1995
                            (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
<S>                                                <C>                 <C>                   <C>
Income:
   Dividends received from
      subsidiaries                                 $         7,751       $        10,755       $         7,323
   Interest and dividends                                      502                    84                    57
   Data processing fees                                      1,606                 1,448                 1,191
   Management and service fees                               2,654                 2,067                 1,846
   Gains on sale of securities                                  81                    67                     5
                                                   ---------------       ---------------       ---------------

      Total income                                          12,594                14,421                10,422
                                                   ---------------       ---------------       ---------------

Expenses:
   Salaries and benefits                                     1,968                 1,807                 1,309
   Interest                                                    123                   276                   267
   Other                                                     2,352                 2,499                 1,946
                                                   ---------------       ---------------       ---------------

      Total expenses                                         4,443                 4,582                 3,522
                                                   ---------------       ---------------       ---------------

Income before provision (credit)
   for income taxes and equity
   in undistributed net
   income of subsidiaries                                    8,151                 9,839                 6,900
Provision (credit) for
   income taxes                                                128                  (279)                 (153)
                                                   ---------------       ---------------       ---------------

Income before equity in
   undistributed net income
   of subsidiaries                                           8,023                10,118                 7,053
Equity in undistributed net
   income of subsidiaries                                   12,302                 5,288                 6,787
                                                   ---------------       ---------------       ---------------

Net income                                         $        20,325       $        15,406       $        13,840
                                                   ===============       ===============       ===============

</TABLE>





                                      F-39
<PAGE>   60

   

                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)

                           STATEMENTS OF CASH FLOWS
                Years Ended December 31, 1997, 1996, and 1995
                            (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
<S>                                                <C>                   <C>                  <C>
Increase (decrease) in cash and cash
 equivalents:
   Cash flows from operating activities:

      Net income                                   $        20,325       $        15,406       $        13,840
                                                   ---------------       ---------------       ---------------
      Adjustments to reconcile
       net income to net cash
       provided by operating
       activities:
         Gain on sale of
           investments available
           for sale                                            (81)                  (67)                   (5)
         Provision for
           depreciation and
           amortization                                        223                   188                   189
         Equity in undistributed
           net income
           of subsidiaries                                 (12,302)               (5,288)               (6,787)
         Change in other assets                              3,197                    59                   100
         Change in accrued
           expenses                                           (556)                  727                  (143)
                                                   ---------------       ---------------       --------------- 

           Total adjustments                                (9,519)               (4,381)               (6,646)
                                                   ---------------       ---------------       ---------------  

   Net cash provided by
       operating activities                                 10,806                11,025                 7,194
                                                   ---------------       ---------------       ---------------

   Cash flows from investing
      activities:
      Capital contributed to
         subsidiaries                                       (2,000)                                       (250)
      Purchase of stock in
         subsidiary banks                                                            (48)                  (23)
      Payment for purchase of
         securities available for
         sale                                                                       (726)
      Proceeds from sales and
         maturities of
         investment securities
         available for sale                                    337                   537                   423
      Net (increase) decrease
         in loans                                             (493)                   68                   968
      Capital expenditures                                     (41)                 (214)                 (167)
                                                   ---------------       ---------------       ---------------
   Net cash provided by
      (used in) investing
      activities                                            (2,197)                 (383)                  951
                                                   ---------------       ---------------       ---------------
</TABLE>





                                      F-40
<PAGE>   61


                   F&M BANCORPORATION, INC. AND SUBSIDIARIES
      -------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)

                     STATEMENTS OF CASH FLOWS (CONTINUED)
                Years Ended December 31, 1997, 1996, and 1995
                            (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                         1997                  1996                  1995
                                                         ----                  ----                  ----
<S>                                                <C>                  <C>                  <C>
   Cash flows from financing activities:
      Proceeds from exercise of
       stock options                               $           227       $           132       $           106
      Proceeds from other
         borrowings                                                                  119
      Principal payments on
         other borrowings                                   (2,778)                                     (1,355)
      Purchase of shares of
         treasury common stock                                                                            (845)
      Dividends paid                                        (7,319)               (5,424)               (4,004)
                                                   ---------------       ---------------       ---------------  

   Net cash used in
      financing activities                                  (9,870)               (5,173)               (6,098)
                                                   ---------------       ---------------       ---------------  

Net increase (decrease) in
   cash and cash equivalents                                (1,261)                5,469                 2,047
Cash and cash equivalents
   at beginning                                              8,348                 2,879                   832
                                                   ---------------       ---------------       ---------------

Cash and cash equivalents
   at end                                          $         7,087       $         8,348       $         2,879
                                                   ===============       ===============       ===============

Supplemental cash flow information:
---------------------------------- 

Cash received during the year
   for income taxes                                $         7,800       $         6,144       $         4,884
Cash paid during the year for:
   Interest                                                    171                   226                   296
   Income taxes                                              7,661                 5,800                 5,133
</TABLE>





                                      F-41
<PAGE>   62
SELECTED CONSOLIDATED FINANCIAL DATA


The following table presents selected consolidated financial data of F&M
Bancorporation, Inc. (the "Company" or "F&M") and its subsidiaries for the five
years ended December 31, 1997. This information and the following discussion
and analysis should be read in conjunction with other financial information 
presented elsewhere in this report. See Note (1) below regarding accounting 
for business combinations.

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------
                                                           1997          1996          1995          1994          1993
-----------------------------------------------------------------------------------------------------------------------
                                                                 (dollars in thousands, except per share data)
<S>                                                   <C>        <C>           <C>           <C>           <C>
SUMMARY OF OPERATIONS (1)
 Interest income                                       $122,547       $98,909       $87,572       $74,158       $70,878
 Interest expense                                        57,845        45,374        39,406        29,524        29,339
-----------------------------------------------------------------------------------------------------------------------
 Net interest income                                     64,702        53,535        48,166        44,634        41,539
 Provision for loan losses                                2,826         2,904         1,713         1,398         1,389
 Non-interest income                                      8,814         6,587         5,356         4,814         5,894
 Net income before extraordinary item and cumulative
   effect of change in accounting principle (2)          20,325        15,406        13,840        10,148        10,199
 Net income                                              20,325        15,406        13,840        10,148        10,272
 Net income applicable to common stock                   20,325        15,406        13,840        10,126        10,085
PERIOD END BALANCE SHEET DATA
 Total assets                                         1,646,003     1,335,902     1,148,871     1,062,771     1,011,304
 Net loans                                            1,182,805       958,235       783,125       727,306       629,068
 Total deposits                                       1,373,372     1,140,371       993,715       925,936       882,158
 Short-term borrowings                                   47,685        42,263        12,627        20,996         6,806
 Other borrowings                                        60,929        18,194        18,090        10,519        16,832
 Preferred stock                                              0             0             0             0         2,073
 Stockholders' equity                                   148,843       122,205       110,963        97,806        97,435
PER SHARE DATA (3)
 Net income per common share before extraordinary
   item and cumulative effect of change in
   accounting principle (2)                                2.09          1.73          1.59          1.16          1.20
 Net income per common share - basic                       2.09          1.73          1.59          1.16          1.21
 Net income per common share - fully diluted               2.08          1.73          1.59          1.16          1.21
 Cash dividends (4)                                         .76           .61           .50           .40           .30
</TABLE>
---------------------
(1)  Except as indicated, the data have been restated to reflect the Company's
     acquisitions of F&M Bank-Portage County in 1993, F&M Bank-Northeast in
     1994, F&M Bank-Waushara County in 1995, F&M Bank-Algoma in 1996, and
     Wisconsin Ban Corp. ("WBC") and Citizen's National Bancorporation, Inc.
     ("CNB") in 1997, all using the pooling of interests method of accounting.
     See Note 3 of Notes to the Company's Consolidated Financial Statements.
     The F&M Bank-Superior acquisition in 1996, and the 1997 acquisitions of
     East Troy Bancshares, Inc.("ETB"), Green County Bank ("GCB") and Clear
     Lake Bancorp, Inc.("CLB"), accounted for as poolings of interests, were
     not material to prior years' reported operating results and accordingly,
     previous years' results have not been restated. The acquisitions of
     Bradley Bank ("BB") and the TCF office in Little Chute in 1996 and the
     1997 acquisition of the Security office in Antigo were accounted for using
     the purchase method of accounting; accordingly, the financial data
     includes results of operations only since the dates of acquisition. On
     January 27, 1998, the Company acquired Sentry Bancorp ("SB") and on
     February 9, 1998 the Company acquired Bank of South Wayne("BSW"). The
     Sentry Bancorp transaction was accounted for using the purchase method of
     accounting and the Bank of South Wayne was accounted as a pooling of
     interests, although F&M does not intend to restate prior results because
     of the bank's relative size.

(2)  Cumulative effect of change in accounting principle in 1993 represents
     the adoption of SFAS No. 109 (Accounting for Income Taxes) by one of the
     Company's acquired subsidiaries.

(3)  Per share information has been restated to reflect the two-for-one stock
     split paid to stockholders on March 19, 1993 and the 10% stock dividend
     paid to stockholders on June 10, 1996 and June 9, 1997.

(4)  Cash dividends per common share are not restated to reflect the
     acquisitions accounted for using the pooling of interests method of
     accounting.


                                     F-42

<PAGE>   63



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION


GENERAL

The following discussion and analysis provides information regarding the
Company's results of operations and financial condition for the years ended
December 31, 1997, 1996 and 1995. These statements have been restated to
reflect the acquisitions, Union State Bank ("USB"), acquired January 9, 1995,
Community State Bank ("CSB") acquired June 28, 1996, Wisconsin Ban Corp
("WBC"), acquired on May 30, 1997 and Citizen's National Bancorporation, Inc.
("CNB"), acquired on August 14, 1997. These transactions have been accounted
for using the pooling of interests method of accounting. Monycor Bancshares,
Inc., acquired on February 5, 1996, East Troy Bancshares ("ETB"), acquired on
January 10, 1997, Green County Bank ("GCB"), acquired on February 27, 1997, and
Clear Lake Bancorp.("CLB"), Inc., acquired on August 12, 1997, accounted for as
pooling of interests, were not material to prior years' reported operating
results; accordingly, previous years' results have not been restated. The
acquisitions of TCF office in Little Chute, acquired April 23, 1996, Bradley
Bank, acquired May 10, 1996, and the Security office in Antigo, acquired on
September 29, 1997, were accounted for using the purchase method of accounting;
accordingly, the Company's financial data includes results of operations of
these entities only since the dates of acquisition. All per share information
has been adjusted to reflect the 10% stock dividends, paid to shareholders on
June 10, 1996 and June 9, 1997.

The Company acquired Sentry Bancorp., Inc. ("SB") on January 27, 1998. This
acquisition was accounted for using the purchase method of accounting. The
Company acquired Bank of South Wayne ("BSW") on February 9, 1998. This
acquisition is being accounted for using the pooling of interests method of
accounting. See Note 19 of Notes to the Company's Consolidated Financial
Statements. Because of the relative size of BSW as compared to F&M, the Company
does not intend to restate periods prior to January 1, 1998 to reflect this
acquisition. Because they were consummated after December 31, 1997, the SB and
BSW acquisitions are not reflected in the following discussion. While future
results and financial condition will reflect the addition of SB and BSW, F&M
does not expect the effects to be material to the Company.

The Company has also announced two pending acquisitions: BancSecurity
Corporation ("BSC") and Financial Management Services of Jefferson ("FMS").
These acquisition will be accounted for using the pooling of interests method
of accounting. Because of the relative size of the entities (those entities
having total assets of approximately $500 million and $100 million,
respectively, at December 31, 1997), the acquisitions are expected to have a
material effect upon F&M and its financial results and condition. Although the
pending acquisitions are expected to be consummated in 1998, each remains
subject to conditions precedent and there can be no assurance of completion.

Discussions in this Management's Discussion and Analysis, and elsewhere in this
Annual Report, that are not statements of historical fact (including statements
in the future tense or which include terms such as "believe", "expect",
"anticipate" or "may") are forward-looking statements that involve risks and
uncertainties, and the Company's actual future results could materially differ
from those discussed. Factors that could cause or contribute to such
differences include, but are not limited to, the Company's future lending and
collections experiences, the effects of acquisitions, competition from other
institutions, changes in the banking industry and its regulation, needs
for technological change, and other factors, including those described in this
Management's Discussion and Analysis and elsewhere in this report.



                                     F-43
<PAGE>   64

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

RESULTS OF OPERATIONS

1997 was a year of continuing growth for F&M. Net interest income in 1997
increased $11.2 million, or 20.9%, to $64.7 million from $53.5 million in 1996
(compared with $48.2 million in 1995). Net income in 1997 increased $4.9
million, or 31.9%, to $20.3 million from $15.4 million in 1996 (compared with
$13.8 million in 1995).

Net income per share was $2.09 in 1997 compared with $1.73 in 1996 and $1.59 in
1995. Fully diluted net income per share was $2.08 in 1997 compared with $1.73
in 1996 and $1.59 in 1995.

Return on average assets was 1.33% in 1997, compared with 1.24% in 1996 and
1.26% in 1995. Return on average stockholders' equity was 14.37% in 1997,
compared with 13.12% in 1996 and 13.31% in 1995.

Increased net interest income, resulting from both acquisitions and internal
growth, has been the major factor affecting the growth in earnings over the
last three years. The Company has been able to keep its net interest margin
relatively constant over this time period, while at the same time increasing
its interest earning assets.

The remainder of this section provides a more detailed explanation of factors
affecting the results of operations.


                                     F-44
<PAGE>   65


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

NET INTEREST INCOME

Net interest income is the most significant component of the Company's
earnings. For analytical purposes, interest earned on tax exempt assets, such
as industrial development revenue bonds and state and municipal obligations, is
adjusted in this discussion to a fully-taxable equivalent basis. This
adjustment is based upon the statutory federal corporate income tax rate, and
any interest expense which is disallowed as a deduction in connection with
carrying these tax exempt assets, and thus facilitates a meaningful comparison
between taxable and nontaxable earning assets.

Net interest income in 1997 increased $11.2 million, or 20.9%, to $64.7 million
from $53.5 million in 1996. This increase is attributable to the increase in
asset volume due to the Company's internal growth, acquisitions accounted for
using the purchase method of accounting and pooling of interests method for
which prior periods were not restated and relative stability of the Company's
net interest margin. Net interest income in 1996 increased 11.1% from $48.2
million in 1995, also attributable to the increase in asset volume.

Interest expense increased due to increase in deposits; both internally
generated and due to acquisitions, an increase in rates on deposits due to
growth in savings deposits, mainly the Treasury Plus product which mirrors the
three month Treasury, and increased other borrowings, which were utilized to
fund loan demand in excess of deposit growth.

Changes in net interest income occur due to fluctuations in the balances and/or
mixes of interest-earning assets and interest-bearing liabilities, and changes
in their corresponding interest yields and costs. In both 1997 and 1996, the
Company experienced its greatest asset growth in loans, which enhanced the
Company's net interest income because loans tend to produce higher rates of
interest paid to the Company than other types of interest earning assets.
Changes in nonperforming assets, together with interest lost and recovered on
those assets also affect comparisons of net interest income.

The following table presents the relative contribution of changes in volume and
interest rates on changes in net income for the periods indicated using average
balances.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                          DECEMBER 31, 1997 VS. 1996
                                                  -------------------------------------------------------
                                                          INCREASE (DECREASE) DUE TO (1)
                                                  -------------------------------------------------------
                                                  VOLUME
                                                  ------
                                        INTERNAL          OUT OF PERIOD
                                          GROWTH          ADJUSTMENTS(3)        RATE              NET
---------------------------------------------------------------------------------------------------------
                                                          (in thousands)
<S>                                     <C>                      <C>          <C>              <C>         
Interest earned on:
 Loans (2)                               $14,444                  $8,365       $(536)             $22,273
 Taxable investment securities              (529)                    658        (115)                  14
 Non-taxable investment securities (2)     1,552                     351         292                2,195
 Other interest income                       (22)                    232         (26)                 184
---------------------------------------------------------------------------------------------------------
Total                                     15,445                   9,606        (385)              24,666
---------------------------------------------------------------------------------------------------------
Interest paid on:                                                                               
 Savings deposits                          2,082                     981       1,205                4,268
 Time deposits                             1,488                   3,310         332                5,130
 Short-term borrowings                     1,201                     117         118                1,436
 Other borrowings                          1,640                     132        (135)               1,637
---------------------------------------------------------------------------------------------------------
Total                                      6,411                   4,540       1,520               12,471
---------------------------------------------------------------------------------------------------------
Net interest income                       $9,034                  $5,066     $(1,905)             $12,195
=========================================================================================================
</TABLE>                                                                      
                                                                              

                                     F-45


<PAGE>   66

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                         DECEMBER 31, 1996 VS. 1995
                                       -----------------------------------------------------------------
                                                         INCREASE (DECREASE) DUE TO (1)
                                       -----------------------------------------------------------------
                                                 VOLUME
                                                 ------
                                       INTERNAL          OUT OF PERIOD
                                         GROWTH          ADJUSTMENTS(3)        RATE               NET
--------------------------------------------------------------------------------------------------------
                                                         (in thousands)
<S>                                    <C>                      <C>          <C>                 <C>         
Interest earned on:
Loans (2)                                $6,898                  $3,694       $(156)             $10,436
Taxable investment securities              (819)                    503         (16)                (332)    
Non-taxable investment securities (2)     1,176                      73        (192)               1,057     
Other interest income                       566                      34         (72)                 528     
--------------------------------------------------------------------------------------------------------     
  Total                                   7,821                   4,304        (436)              11,689     
--------------------------------------------------------------------------------------------------------     
Interest paid on:                                                                                            
  Savings deposits                          734                     782         803                2,319     
  Time deposits                           1,450                   1,214         620                3,284     
  Short-term borrowings                     784                      81         (59)                 806     
  Other borrowings                         (490)                      0          51                 (439)    
--------------------------------------------------------------------------------------------------------     
Total                                     2,478                   2,077       1,415                5,970    
--------------------------------------------------------------------------------------------------------
Net interest income                      $5,343                  $2,227     $(1,851)              $5,719
========================================================================================================
</TABLE>


(1)  The change in interest due to both rate and volume has been allocated to
     volume and rate changes in proportion to the relationship of the absolute
     dollar amounts of the change in each.

(2)  The amount of interest income on nontaxable loans and investment
     securities has been adjusted to its fully taxable equivalent.

(3)  Out of period adjustments reflect acquisitions in that year for which
     prior financial statements were not restated.


                                     F-46

<PAGE>   67

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

The following table presents the components of the changes
in the net yield on interest-earning assets (on a fully
tax equivalent basis) for the three-year period ended
December 31, 1997. Because of the increase in the
percentage of assets represented by loans, the Company's
yield on interest-earning assets for 1997 increased from
1996, although the interest rates earned for various
classes of assets decreased slightly during the year. The
Company's effective rate on interest-bearing liabilities
increased in 1997 as compared to 1996, as a result of
increased interest paid on deposits, and slightly lower
rates paid on other borrowings. The increase over the
period is reflected in the 1997 yield on interest-earning
assets which increased by 0.05%, after a decrease of 0.01%
in 1996 and an increase of 0.65% in 1995 respectively. The
effective rate on liabilities as a percentage of
interest-earning assets increased by 0.12% in 1997 and
0.06% in 1996, respectively, producing a negative impact
on net interest margin on interest-earning assets of 0.07%
for both 1997 and 1996. In 1995, net interest margin on
interest-earning assets decreased 0.06%.

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                ----------------------------------------------------------------
                                                      1997                    1996                   1995
                                                ----------------------------------------------------------------
                                                YIELD/   CHANGE         YIELD/     CHANGE      YIELD/   CHANGE
                                                 RATE   FROM 1996        RATE    FROM 1995      RATE   FROM 1994
---------------------------------------------------------------------------------------------------------------- 
<S>                                             <C>     <C>             <C>        <C>         <C>        <C>
Yield on interest-earning assets                 8.70%      0.05%         8.65%    (0.01)%      8.66%      0.65%
Effective rate on liabilities as a percent                                         
  of interest-earning assets                     3.99%      0.12%         3.87%      0.06%      3.81%      0.71%
---------------------------------------------------------------------------------------------------------------- 
Net interest margin on interest-earning assets   4.71%    (0.07)%         4.78%    (0.07)%      4.85%    (0.06)%
================================================================================================================ 
</TABLE>   




                                     F-47
<PAGE>   68

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

The following table sets forth average consolidated balance sheet data and
average yield and rate data on a tax equivalent basis for the periods
indicated.



<TABLE>
<CAPTION>
                                                  1997                               1996                               1995
                                  ------------------------------------------------------------------------------------------------
                                  AVERAGE                 YIELD/     AVERAGE              YIELD/      AVERAGE               YIELD/
(dollars in thousands)            BALANCE    INTEREST     RATE       BALANCE    INTEREST  RATE        BALANCE    INTEREST   RATE
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>           <C>      <C>          <C>       <C>       <C>          <C>        <C>
ASSETS                                                                                                          
Interest earning assets                                                                                         
 Loans (1) (2) (3)             $1,138,031    $104,866      9.21%    $891,220     $82,593   9.27%     $776,903     $72,157    9.29%
Taxable investment                                                                                              
 securities                       159,646       9,830      6.16%     157,492       9,816   6.23%      162,579      10,148    6.24%
Nontaxable investment                                                                                           
 securities (2)                   121,222       9,709      8.01%      97,369       7,514   7.72%       81,214       6,457    7.95%
Other investments                  28,959       1,618      5.59%      25,209       1,434   5.69%       14,731         906    6.15%
                               ----------------------             ----------------------           ----------------------
Total                          $1,447,858    $126,023      8.70%  $1,171,290    $101,357   8.65%   $1,035,427     $89,668    8.66%
Non-interest earning assets                                                                                     
Cash and due from banks            39,205                             34,286                           34,759   
Premises & Equip. - net            31,947                             26,327                           22,296   
Other assets                       28,215                             22,920                           19,034   
Less: Allowance for loan loss     (14,232)                           (11,014)                          (9,608)  
                               ----------                         ----------                       ----------
Total                          $1,532,993                         $1,243,809                       $1,101,908   
                               ==========                         ==========                       ==========
LIABILITIES & STOCKHOLDERS' EQUITY   
Interest bearing liabilities                                                                                    
 Savings deposits                $483,921     $15,453      3.19%    $385,830     $11,185   2.90%     $331,882      $8,866    2.67%
 Time deposits                    634,498      36,582      5.77%     550,905      31,452   5.71%      504,325      28,168    5.59%
 Short-term borrowings             56,678       3,286      5.80%      33,833       1,850   5.47%       18,062       1,044    5.78%
 Other borrowings                  42,772       2,524      5.90%      13,014         887   6.82%       20,220       1,326    6.56%
                               ----------------------               --------------------             --------------------
 Total                         $1,217,869     $57,845      4.75%    $983,582     $45,374   4.61%     $874,489     $39,404    4.51%
Non-interest bearing                                                                                            
liabilities                                                                                                     
 Demand deposits                  157,753                            130,030                          112,386   
 Other liabilities                 15,890                             12,779                           11,035   
 Stockholders' equity             141,481                            117,418                          103,998   
                               ----------                         ----------                       ----------
Total                          $1,532,993                         $1,243,809                       $1,101,908   
                               ==========                         ==========                       ==========
Net interest income                           $68,178                            $55,983                          $50,264 
Rate spread                                                3.95%                           4.04%                             4.15%
Net interest margin                                        4.71%                           4.78%                             4.85%
</TABLE>   
           

(1)  For the purposes of these computations, non-accruing loans are included
     in the daily average loan amounts outstanding.

(2)  The amount of interest income on non-taxable investment securities and
     loans has been adjusted to its fully taxable equivalent.

(3)  Loan fees are included in total interest income as follows:
     1997-$2,163,000; 1996-$1,675,000; 1995-$1,230,000.


                                     F-48

<PAGE>   69

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

The following table sets forth the mix of average interest-earning assets and
average interest-bearing liabilities.

<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------
                                     1997            1996             1995
--------------------------------------------------------------------------
<S>                                <C>             <C>              <C>
Loans                               78.6%            76.1%           75.0%
Taxable investment securities       11.0%            13.4%           15.7%
Non-taxable investment securities    8.4%             8.3%            7.8%
Other investments                    2.0%             2.2%            1.5%
--------------------------------------------------------------------------
                                   100.0%           100.0%          100.0%
--------------------------------------------------------------------------
Savings deposits                    39.7%            39.2%           38.0%
Time deposits                       52.1%            56.0%           57.7%
Short-term borrowings                4.7%             3.5%            2.0%
Other borrowings                     3.5%             1.3%            2.3%
--------------------------------------------------------------------------
                                   100.0%           100.0%          100.0%
---------------------------------------------------------------------------
</TABLE>                                                     


The preceding table reflects the results of Management's strategy to increase
loans as a percent of earning assets coupled with generally strong demand for
loans. It also reflects the effects of pooled acquisitions. Acquired banks
frequently have a lower loan percentage than F&M, which F&M is then able to
increase after acquisition. However, because of pooling accounting, their
percentages may affect F&M's prior periods. Based on the current economic
conditions, management has established a range of average loans to earning
assets of between 70% and 80% which it believes to be the optimum level for
F&M.

Interest rates fluctuated throughout 1997, but remained relatively stable.
Savings deposits increased faster than time deposits, this increase was
partially attributed to the promotion of our money market product (Treasury
Plus) indicating that a larger part of F&M's deposit growth has come from
increase balances of savings deposits. Short-term borrowing increased because
the Company took advantage of the situation in which the short term rates were
more attractive than current deposit rates. The increase in other borrowings is
due to the Company locking historically lower interest rates for a longer
period of time. Increasing long term borrowing, also, balances out the mix of
short term borrowing and long term borrowing. For more information regarding
borrowing, see "Borrowings" below and Notes 11 and 12 of Notes to the Company's
Consolidated Financial Statements.

PROVISION FOR LOAN LOSSES

The amount charged to provision for loan losses is based on Management's
evaluation of the loan portfolio. Management determines the adequacy of the
allowance for loan losses, both on a bank by bank basis and on an overall basis
for the Company, based on past loan loss experience, current economic
conditions, composition of the loan portfolio (including the historical
performance of, and the F&M subsidiary banks' evaluation of the prospects for,
each of the component loans, and the collateral value therefore) and the
anticipated potential for future loss. Management is also mindful of the
expectations of banking industry regulators for certain levels of allowances, 
although no particular regulatory obligations have been imposed on the Company
in this regard.

The provision for loan losses was $2.8 million in 1997, compared with $2.9
million in 1996 and $1.7 million in 1995. Although total loans grew, the 
provision decreased slightly in 1997 because of increased recoveries on charged
off loans and a decrease in non-performing assets. The allowance for loan 
losses as a percentage of gross loans outstanding was 1.26% at December 31, 
1997, as compared to 1.27% at both December 31, 1996 and 1995. The reduction in
the allowance percentage resulted from the relatively greater increase in the 
level of loans as compared to net provision. Net charge-offs as a percentage of
average loans outstanding were 0.12% in 1997, 0.14% in 1996 and 0.12% in 1995.
Charge-offs in 1997 were not concentrated in any industry or business segment.

NON-INTEREST INCOME

The following table presents the major components of non-interest income.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
(dollars in thousands)                          1997               1996           1995
--------------------------------------------------------------------------------------
<S>                                          <C>                <C>            <C>
                                                                    
Service fees                                  $4,430             $3,392         $2,971
Net securities gains                             194                 59             34
Other operating income                         4,190              3,136          2,351
--------------------------------------------------------------------------------------
Total                                         $8,814             $6,587         $5,356
======================================================================================
</TABLE>                                                            
                                                           


                                     F-49
<PAGE>   70

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


The Company stresses the importance of growth in non-interest income as one of
its key long-term strategies. Non-interest income for 1997 increased $2.2
million or 33.8% when compared to 1996. The increase in service fees during
1997 was attributable primarily to increased services (primarily relating to
checking and other depository accounts) sold, along with an increase in the
amount charged for those services. Purchase acquisitions and acquisitions of
banks for which prior periods were not restated also contributed to the
increase of non-interest income.

During all three periods, net security gains were minimal. These gains were
realized as management responded to market conditions and opportunities. For
additional detail see Note 5 of Notes to the Company's Consolidated Financial
Statements.

The increase in other operating income during 1997 was due principally to
increases in secondary market commissions, along with an increase in other
miscellaneous charges. The volume of mortgage refinancings and new home
purchases increased in 1997, in spite of fluctuating interest rate conditions,
and therefore increased the Company's related secondary market commissions. The
increase in the operating income between 1995 and 1996 reflects primarily an
increase in mortgage refinancing (and, therefore, secondary market
commissions).

NON-INTEREST EXPENSE

The following table presents the major components of non-interest expense.

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------- 
  (dollars in thousands)                           1997            1996           1995
-------------------------------------------------------------------------------------- 
<S>                                            <C>              <C>           <C>
Salaries and employee benefits                  $22,972         $18,750        $16,438
Occupancy expenses, net                           5,823           4,702          4,424
Data processing                                   1,617           1,533          1,586
Goodwill amortization                               689             524            398
FDIC insurance premiums                             155             120          1,087
Other operating expenses                         10,098           9,191          7,927
-------------------------------------------------------------------------------------- 
Total                                           $41,354         $34,820        $31,860
======================================================================================
</TABLE>                                                           

The Company's total non-interest expense in 1997 increased $6.5 million, or
18.8%, to $41.4 million from $34.8 million in 1996. The increase was primarily
due to acquisitions in 1997 and 1996, resulting both from the costs of the
acquisitions and increase from those with respect to which prior periods were
not restated. Salary and employee benefits rose due to new locations as well as
increased salary levels. Occupancy expenses increased due to servicing of new
locations and operations. Data processing fees increased slightly, primarily
due to volume. The Company expects to review its data processing arrangements
during 1998, including continuing review of its "year 2000 compliance". While
the Company has not identified expected material expenditures as a result of
"year 2000 compliance"; there can be no assurances that will be the case in
part because certain decisions as to future processing have not been finalized
and certain "year 2000 compliance" issues assume third party resolution. FDIC
deposit insurance premiums increased due to increased deposit levels from
acquisition and internal growth, although remained well below 1995 levels due
to changes in insurance rates in May 1995. The increase in other operating 
expenses resulted from a variety of increases in other expense categories, 
including increases resulting from acquisitions for which prior periods were 
not restated.

The Company's overhead ratio, which is computed by subtracting non-interest
income from non-interest expense (excluding net securities transactions) and 
dividing by average total assets, was 2.14% in 1997, 2.27% in 1996, and 2.41% 
in 1995.

Due to the sensitivity of the overhead ratio to changes in the size of the
balance sheet, management also looks at trends in the efficiency ratio to
assess the changing relationship between operating expenses and income. The
efficiency ratio measures the amount of cost expended by the Company to
generate a given level of revenues in the normal course of business. It is
computed by dividing total operating expense by net interest income on a
fully-taxable equivalent basis and non-interest income from ongoing operations,
excluding nonrecurring items. The efficiency ratio was 53.85% in 1997, 55.70%
in 1996 and 57.32% in 1995. The decreases in this ratio and the overhead ratio
resulted from the various factors set forth above.


                                     F-50
<PAGE>   71




MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

INCOME TAXES

The Company's provision for income taxes in 1997 increased $2.0 million, or
28.9%, to $9.0 million from $7.0 million in 1996. The 1996 level represents a
14.5% increase from $6.1 million in 1995. As a percentage of taxable income,
the effective tax rate was 30.7% in 1997, 31.2% in 1996 and 30.6% in 1995 of
income before taxes. The effective tax rate has remained constant as compared
to 1996. For more information regarding income taxes see Note 13 of Notes to
the Company's Consolidated Financial Statements.

NET INCOME

Net income in 1997 increased by $4.9 million, or 31.9% to $20.3 million from
$15.4 million in 1996. This compares with an increase in income of $1.6 
million, or 11.3%, for 1996 from $13.8 million in 1995.

Return on average stockholders' equity was 14.37% in 1997 compared with 13.12%
in 1996 and 13.31% in 1995. The return on average assets was 1.33% in 1997
compared with 1.24% in 1996 and 1.26% in 1995.

Basic net income per share was $2.09 in 1997 compared with $1.73 in 1996 and
$1.59 in 1995. The Company maintains a stock option plan. Fully diluted net
income per share was $2.08 in 1997 compared with $1.73 in 1996 and $1.59 in
1995; the difference from basic net income per share results from the effects
of outstanding stock options.

FINANCIAL CONDITION

In addition, 1997 was a year of growth for F&M in total assets and equity. Year
end total assets in 1997 grew to $1.646 billion, a 23.2% increase from $1.336
billion in 1996. Of the 23.2% increase, approximately 12% growth resulted from
acquisitions for which prior financial statements were not restated, and
approximately 11% resulted from internal growth. Total shareholders' equity at
December 31, 1997 was $149 million, a 21.8% increase from $122 million in 1996.
The balance of this section further discusses changes in the Company's assets,
liabilities and equity.

                                  [BAR GRAPH]

<TABLE>
<CAPTION>
Asset Growth
(Millions) 

80    81    82    83    84   85     86     87     88     89     90     91     92     93     94     95     96       97
-------------------------------------------------------------------------------------------------------------------------
<S>   <C>  <C>    <C>  <C>   <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>   <C>    <C>     <C>    <C>      <C>
37.1  45.6  56.0  66.2  79.4 140.04 153.36 195.8  257.4  273.3  319.2  451.3  471.3  549.0  776.8  943.1  1,173.5  1646.0
</TABLE>


Note: These figures reflect individual bank assets as of the end of each year.
They do not reflect a restatement for subsequent acquisitions accounted for as
a pooling of interest.



                                     F-51
<PAGE>   72


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

LOAN PORTFOLIO


The following table sets forth the major categories of loans outstanding and
the percentage of total loans for each category at the dates indicated.

<TABLE>
<CAPTION>

                                          DECEMBER 31, 1997      DECEMBER 31, 1996     DECEMBER 31, 1995
                                      ------------------------------------------------------------------
(dollars in thousands)                    AMOUNT        %       AMOUNT        %       AMOUNT        %   
--------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>        <C>        <C>        <C>        <C>
Commercial and industrial               $244,629      20.4%   $188,952      19.5%   $137,109       17.3%
Agricultural                              79,351       6.6%     80,245       8.2%     71,895        9.1%
Real estate construction                  38,929       3.3%     36,822       3.8%     23,725        3.0%
Real estate mortgage                     748,874      62.5%    596,691      61.5%    500,583       63.1%
Installment and other consumer loans      86,112       7.2%     67,844       7.0%     59,874        7.5%
--------------------------------------------------------------------------------------------------------
Total                                 $1,197,895     100.0%   $970,554     100.0%   $793,186      100.0%
========================================================================================================
</TABLE>


<TABLE>
<CAPTION>

                                          DECEMBER 31, 1994      DECEMBER 31, 1993
                                      --------------------------------------------
(dollars in thousands)                    AMOUNT       %        AMOUNT        %
----------------------------------------------------------------------------------
<S>                                    <C>           <C>      <C>         <C>
Commercial and industrial               $120,988     16.4%    $112,799      17.7%
Agricultural                              68,116      9.3%      63,023       9.9%
Real estate construction                  19,211      2.6%      20,313       3.2%
Real estate mortgage                     467,165     63.4%     386,090      60.5%
Installment and other consumer loans      61,082      8.3%      55,884       8.7%
----------------------------------------------------------------------------------
Total                                   $736,562    100.0%    $638,109     100.0%
==================================================================================
</TABLE>                                          



                          LOAN PORTFOLIO COMPOSITION

                          December 31, 1997


                                 [PIE GRAPH]


7%  Agriculture 
7%  Installment and Other Consumer 
3%  Real Estate Construction 
20% Commercial and Industrial 
63% Real Estate Mortgage 

Loan growth was 23.4% in 1997 compared with 22.4% in 1996. The 1997 and 1996
increase was primarily a result of increased sales efforts at the Company's
subsidiary banks, although approximately $93.0 million in loans (representing
approximately 10% of the increase) resulted from acquisitions in which the
Company did not restate its prior financial statements, with the remaining
balance resulting from internal growth.

During 1997 and 1996 the loan mix in the Company's portfolio remained
relatively constant, with a trend toward commercial loans due to greater demand.

The Company maintains a diversified loan portfolio and therefore, management
believes there is minimal exposure to loan concentration losses. At December
31, 1997, the Company believes that there were no loan concentrations to a
multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic or other conditions. By maintaining a
diversity of types of borrowers, the Company has attempted to prevent material
losses due to economic difficulties affecting particular industries.


                                     F-52
<PAGE>   73


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

The following table sets forth the scheduled repayments of the loan portfolio
and the sensitivity of loans to interest rate changes at December 31, 1997
(excluding one to four family residential property mortgages and consumer
loans).

<TABLE>
<CAPTION>

                                                    MATURITY
                                      ----------------------------------------
                                                      OVER ONE
                                      ONE YEAR     YEAR THROUGH           OVER
                                       OR LESS       FIVE YEARS     FIVE YEARS
                                      ----------------------------------------
                                                  (In thousands)
<S>                                    <C>             <C>            <C>
Commercial and industrial               $171,238       $64,813         $ 8,578
Agricultural                             l59,944        15,494           3,913
Real estate construction                  34,451         4,444              34
------------------------------------------------------------------------------
Total                                   $265,633       $84,751         $12,525
==============================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                        INTEREST SENSITIVITY    
                                                       -----------------------
AMOUNT OF LOANS DUE AFTER ONE YEAR WITH:               FIXED          VARIABLE
                                                        RATE              RATE
                                                       ----------------------- 
                                                             (In thousands)   
<S>                                                    <C>              <C>
Commercial and industrial                              $68,333          $5,058
Agricultural                                            19,130             277
Real estate construction                                 4,454              24
------------------------------------------------------------------------------
Total                                                  $91,917          $5,359
==============================================================================
</TABLE>                                                                      
                                                                              

NON-PERFORMING ASSETS

Non-performing assets are a broad measure of problem loans. The following table
sets forth the amount of non-performing loans, other real estate owned and
non-performing assets, and each of their percentages to total loans as of the
dates indicated.

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                      --------------------------------------------------------------------
(dollars in thousands)                   1997         %          1996          %        1995          %
----------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>         <C>           <C>        <C>         <C>
Non-accrual loans                     $10,606        0.89%      $12,353       1.27%     $7,317       0.92%
Loans past due 90 days or more            392        0.03           434       0.04         485       0.06
Restructured loans                          0        0.00           216       0.02         706       0.09
----------------------------------------------------------------------------------------------------------
Total non-performing loans             10,998        0.92        13,003       1.33       8,508       1.07
Other real estate owned                   917        0.08         1,842       0.19         846       0.11
----------------------------------------------------------------------------------------------------------
Total non-performing assets           $11,915        1.00%      $14,845       1.52%     $9,354       1.18%
==========================================================================================================
                                                            
</TABLE>


<TABLE>
<Caption

                                                       DECEMBER 31,           
                                       --------------------------------------------
(dollars in thousands)                   1994          %         1993          %     
-----------------------------------------------------------------------------------
<S>                                    <C>            <C>       <C>           <C>
Non-accrual loans                      $6,609         0.90%     $ 5,310       0.83%     
Loans past due 90 days or more            393         0.05          461       0.07     
Restructured loans                        255         0.03          494       0.08     
-----------------------------------------------------------------------------------
Total non-performing loans              7,257         0.98        6,265       0.98     
Other real estate owned                 1,322         0.18        2,614       0.41     
-----------------------------------------------------------------------------------
Total non-performing assets            $8,579        1.16%      $ 8,879       1.39%     
===================================================================================
</TABLE>  
                                                 
Maintaining excellent credit quality continues to be a priority for the
Company. Non-performing assets as a percentage of total loans outstanding
decreased in 1997 to 1.00% compared with 1.52% in 1996 and 1.18% in 1995.
Non-accrual loans decreased in 1997 because of developments with respect to a
number of separate loans, in different locations and industries. The decrease
in 1997 was due largely to the Company's attentive monitoring of the loan
portfolio. Management continues to take an aggressive collection effort on
these assets and regularly reviews and evaluates the non-performing credits to
determine appropriate handling and action.



                                     F-53
<PAGE>   74


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


LOAN QUALITY

                                 [BAR GRAPH]

<TABLE>
<CAPTION>

        Non-performing assets to    New Charge offs to average   Allowance for loan losses to           
        period end loans            loans outstanding            period end loans
<S>          <C>                         <C>                         <C>
93            1.39%                     0.13%                           1.36%
94            1.16%                     0.12%                           1.26%
95            1.18%                     0.12%                           1.27%
96            1.52%                     0.14%                           1.27%
97            1.00%                     0.12%                           1.26%

</TABLE>

Non-accrual loans at December 31, 1997 decreased 0.38% as a percentage of total
loans, as compared to 1996. Non-accrual loans are at a level the Company
considers manageable and continues to work at reducing the level of
nonperforming loans. Furthermore, the Company considers its allowance for loan
losses adequate to cover this level of non-accrual loans, although it regularly
reviews the various factors used in determining the provision and allowance for
loan losses.

The gross interest income that would have been recognized on non-accrual loans
in 1997 if the loans had been current in accordance with their original terms
was approximately $1,085,000, of which approximately $369,000 was collected and
included in the Company's income for 1997.

It is the policy of the F&M subsidiary banks to place a loan on non-accrual
status when the loan's principal and accrued interest is not expected to be
collected in full or when the loan becomes contractually past due 90 days or
more as to principal or interest and is not guaranteed by an outside source.
Loans past due 90 days or more may be retained on accrual status if they are
guaranteed by a third party and the bank believes that such guaranty will be
adequate to assure collection.

There were no particular loans as to which payments were current at December
31, 1997, which in the opinion of management, and to its best knowledge, will
not be paid according to their terms.



                                     F-54
<PAGE>   75


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes average loan balances at the end of each period;
changes in the allowance for loan losses arising from loans charged-off and
recoveries on loans previously charged-off, by loan category; and provisions
for loan losses which have been charged to expense.

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31
                                                    -------------------------------------------------------------------------
(dollars in thousands)                                     1997           1996            1995            1994       1993      
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>             <C>             <C>              <C>       <C>       
Average balance of loans for period                  $1,138,031       $891,220        $776,903        $683,384  $582,714  
=============================================================================================================================
Allowance for loan losses at beginning of period         12,319         10,060           9,255           8,696     8,071     
Allowance for loan losses of banks acquired in                                                                                 
  purchase transactions and for which prior                                                                                    
  periods are not restated                                1,329            587              --              --        --        
Loans charged off                                                                                                              
  Commercial and Industrial                                 684            698             672             507       389       
  Agricultural                                               88            278             117              54       280       
  Real Estate - Mortgage                                    308             70              98             169        66        
  Installments and Other Consumer Loans                     667            467             322             385       374       
-----------------------------------------------------------------------------------------------------------------------------
Total charge offs                                         1,747          1,513           1,209           1,115     1,109     
Recoveries on loans previously charged off                                                                                     
  Commercial and Industrial                                  83            118              62             115       141       
  Agricultural                                               33             16              45              35        30        
  Real Estate - Mortgage                                      8             17              53              17        47        
  Installment and Other Consumer Loans                      239            130             141             109       127       
-----------------------------------------------------------------------------------------------------------------------------
Total recoveries                                            363            281             301             276       345       
Net loans charged off                                     1,384          1,232             908             839       764       
Provisions for loan losses                                2,826          2,904           1,713           1,398     1,389     
-----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period              $15,090        $12,319         $10,060          $9,255    $8,696    
=============================================================================================================================
Ratio of net charge offs during period to                                                                                      
  average loans outstanding                                0.12  %        0.14  %         0.12  %         0.12  %   0.13  %   
Allowance for loan losses to total loans                   1.26  %        1.27  %         1.27  %         1.26  %   1.36  %   
</TABLE>  
          
          
                                     F-55


<PAGE>   76


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

The following table summarizes the allocation of allowances for loan losses and
gives a breakdown of the percentage of loans in each category.

<TABLE>
<CAPTION>
                                           DECEMBER 31, 1997     DECEMBER 31, 1996     DECEMBER 31, 1995
                                          ----------------------------------------------------------------
                                                       PERCENT               PERCENT               PERCENT
                                                      OF LOANS              OF LOANS              OF LOANS
                                          AMOUNT OF    IN EACH  AMOUNT OF    IN EACH  AMOUNT OF    IN EACH
                                            RESERVE   CATEGORY    RESERVE   CATEGORY    RESERVE   CATEGORY
                                           FOR LOAN   TO TOTAL   FOR LOAN   TO TOTAL   FOR LOAN   TO TOTAL
(dollars in thousands)                       LOSSES      LOANS     LOSSES      LOANS     LOSSES      LOANS
----------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>       <C>         <C>       <C>         <C>
Commercial, industrial, and agricultural     $6,942       27.0%    $5,049       27.7%    $4,151       26.4%
Real estate - construction                      245        3.3        259        3.8        166        3.0
Real estate - mortgage                        5,350       62.5      4,613       61.5      3,739       63.1
Installment and other consumer loans          2,553        7.2      2,398        7.0      2,004        7.5
----------------------------------------------------------------------------------------------------------
                                            $15,090      100.0%   $12,319      100.0%   $10,060      100.0%
==========================================================================================================
</TABLE>


<TABLE>
<CAPTION>

                                           DECEMBER 31, 1994     DECEMBER 31, 1993
                                         -------------------------------------------
                                                       PERCENT               PERCENT
                                                      OF LOANS              OF LOANS
                                          AMOUNT OF    IN EACH  AMOUNT OF    IN EACH
                                            RESERVE   CATEGORY    RESERVE   CATEGORY
                                           FOR LOAN   TO TOTAL   FOR LOAN   TO TOTAL
(dollars in thousands)                       LOSSES      LOANS     LOSSES      LOANS
------------------------------------------------------------------------------------
<S>                                          <C>         <C>       <C>         <C>
Commercial, industrial, and agricultural     $3,859       25.7%    $4,131       27.6%
Real estate - construction                      130        2.6        140        3.2
Real estate - mortgage                        3,693       63.4      3,130       60.5
Installment and other consumer loans          1,573        8.3      1,295        8.7
------------------------------------------------------------------------------------
                                             $9,255      100.0%    $8,696      100.0%
====================================================================================
</TABLE>


The allowance for loan losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance for loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible based on evaluations of the collectibility of loans and
prior loan loss experience. In determining the additions to the allowance
charged to operating expenses, management considered historical loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, and current economic conditions that may affect 
the borrower's ability to pay.

The degree of risk associated with the Company's loans is generally greater in
the commercial, industrial and agricultural categories, representing 27.0% of
total loans at December 31, 1997. Accordingly, management has allocated a
significantly larger portion of the allowance for loan losses to these types of
loans.

The ultimate recovery of all loans is susceptible to future market and economic
factors beyond the Company's control as well as factors affecting particular
borrowers. Also, the process of setting loss reserves involves an estimation of
future occurrences, and is inherently uncertain. These factors may result in
future losses or recoveries differing significantly from the allowances and
reserves provided in the financial statements.



                                     F-56
<PAGE>   77

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

INVESTMENT PORTFOLIO

The following table sets forth the distribution of investment securities
(securities held to maturity and available for sale) and their percentage to
total investment securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                  -------------------------------------------------------
                                                         1997               1996               1995
                                                  -------------------------------------------------------
(dollars in thousands)                              AMOUNT  PERCENT    AMOUNT  PERCENT    AMOUNT  PERCENT
--------------------------------------------------------------------------------------------------------- 
<S>                                               <C>         <C>     <C>        <C>      <C>       <C>
U.S. Treasury securities and obligations of
  U.S. Government corporations and agencies        $42,657     13.9%   $50,305    20.1%   $59,893    24.1%
Obligations of states and political subdivisions   139,363     45.4    118,704    47.5     94,562    38.1
Debt securities issued by foreign government            25      0.0         25     0.0         25     0.0
Mortgage-backed securities                         101,894     33.2     64,995    26.0     71,659    28.9
Other securities                                    22,898      7.5     15,943     6.4     22,164     8.9
--------------------------------------------------------------------------------------------------------- 
Total investments                                 $306,837    100.0%  $249,972   100.0%  $248,303   100.0%
=========================================================================================================
</TABLE>

During 1997, the investment portfolio make-up changed relative with past years,
with a decrease in U.S. treasuries and agencies and an increase in obligations
of states and political subdivisions and mortgage-backed securities. The
Company took advantage of attractive spread relationships in the non-taxable
market and also lengthened the average maturity in the investment portfolio to
increase yields. Mortgage-back securities increased due to acquisitions for
which prior periods were not restated and more attractive rates than U.S.
treasury securities.

INVESTMENT PORTFOLIO

December 31, 1997

                [PIE CHART]                       [PIE CHART]

                Composition                         Quality

             Other 7.5%                     BAA 1%
             Treasuries/Agencies 13.9%      AA 2%
             Mortgage Backed 33.2%          A 5%        
             Municipals 45.4%               Non-rated 12%
                                            Treasuries/Agencies AAA 80%



The following tables show the relative maturities and weighted average interest
rates on a tax equivalent basis of investment securities as of December 31,
1997. Although the maturities of the investment portfolio have lengthened from
1996, the Company feels liquidity remains adequate.

<TABLE>
<CAPTION>
                                                 AFTER ONE           AFTER FIVE
                                 WITHIN          BUT WITHIN          BUT WITHIN         AFTER
                                ONE YEAR         FIVE YEARS          TEN YEARS        TEN YEARS
---------------------------------------------------------------------------------------------------
(dollars in thousands)         AMOUNT  YIELD      AMOUNT  YIELD     AMOUNT  YIELD     AMOUNT  YIELD
---------------------------------------------------------------------------------------------------
<S>                          <C>       <C>    <C>         <C>    <C>        <C>    <C>        <C>
U.S. Treasury and other
 U.S. Government agencies and
 corporations*                $23,447   4.95%    $26,756   6.41%   $21,504   6.26%   $72,844  6.32%
States and political
 subdivisions (domestic)       11,657   7.01      35,084   7.81     37,585   7.92     55,037   8.39
Other bonds, notes,
 and debentures                 6,146   5.53      10,533   6.69      1,799   5.26      4,445   6.32
---------------------------------------------------------------------------------------------------
Total                         $41,250  5.62%     $72,373  7.13%    $60,888  7.26%   $132,326  7.18%
===================================================================================================
</TABLE>


*Includes floating rate securities which reprice monthly but which mature
during the indicated time period.


                                     F-57

<PAGE>   78


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

Inherent in any portfolio which includes mortgage-backed securities, there
exist both prepayment and maturity extension risk. The Company is not immune to
these same type risks. The Company's investments in these type of securities
are predominantly in straight U.S. Agency issued mortgage-backed pass-throughs
and lower risk types of real estate mortgage investments
conduits/collateralized mortgage obligations. The major categories of the
mortgage-backed security portfolio and dollar values as of December 31, 1997,
are as follows: fixed rate mortgage-backed pass-throughs-$10.7 million;
variable rate mortgage-backed pass-thoughs-$7.6 million; fixed rate real estate
mortgage investment conduits/collateralized mortgage obligations-$46.3 million;
and floating rate real estate mortgage investment conduits/collateralized
mortgage obligations-$37.3 million.

For more information regarding the investment portfolio, including the
breakdown between securities held to maturity and available for sale, see Note
5 of Notes to the Company's Consolidated Financial Statements.

DEPOSITS

The following table sets forth average deposits and their percentage to total
average deposits at the dates indicated.

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                -------------------------------------------------------------
                                      1997                  1996                    1995
                                AMOUNTS  PERCENT      AMOUNTS  PERCENT        AMOUNTS  PERCENT
----------------------------------------------------------------------------------------------
                                                  (dollars in thousands)
<S>                          <C>         <C>      <C>          <C>          <C>       <C>
Non-interest bearing demand  $  157,753    12.3%    $  130,030    12.2%      $112,386     11.8%
Interest-bearing demand         115,703     9.1        104,709     9.8         98,843     10.4
Savings deposits                368,218     8.9        281,121    26.4        233,039     24.6
Time deposits                   634,498     9.7        550,905    51.6        504,325     53.2
----------------------------------------------------------------------------------------------
Total                        $1,276,172   100.0%    $1,066,765   100.0%      $948,593    100.0%
==============================================================================================
</TABLE>                                                           


Year-end deposits increased 20.4% in 1997 compared with an increase of 14.8% in
1996 over 1995.

The amount of time certificates of deposit issued in amounts of $100,000 or
more and outstanding as of December 31, 1997 was: $149,642,000. Their maturing
distribution was as follows:

<TABLE>
           <S>                                            <C>
           --three months or less                         $66,971,000
           --over three months and through twelve months  $68,187,000
           --over one year                                $14,484,000
</TABLE>


The increase in time certificates of deposit issued in amounts of $100,000 or
more of approximately $50 million over December 31, 1996 was due primarily to
internal growth, acquisitions for which prior periods were not restated and
purchase transactions. Neither F&M or its subsidiaries have any deposits in
foreign banking offices.

Borrowings

Short-term borrowings at December 31, 1997 were $47.7 million, as compared to
$42.3 million at December 31, 1996. Short-term borrowings consist primarily of
repurchase agreements and federal funds purchased. During 1997, F&M has used
short-term borrowings (along with increased deposits) to fund its increasing
loan demand. Use of short-term funds at year end 1997 reflected the 
attractiveness of rates for those funds. Going forward, continued reliance
on short-term borrowings may be required if loan demand continues to outpace 
deposit growth, and therefore short-term borrowings are expected to vary from 
time to time.

Several of the Company's subsidiary banks, as members of the Federal Home Loan
Bank (FHLB), had borrowings from the FHLB as of December 31, 1997 and 1996. 
These borrowings are secured by pledges of mortgage loans, and totaled $60.9 
million at December 31, 1997, compared to $18.2 million at December 31, 1996. 
The increase in other borrowings in 1997 was due primarily to attractiveness of
longer term rates and the Company's implementation of a leverage program in 
which FHLB borrowings are matched to securities purchased.  These borrowings 
had original maturities of five months to eight years, with rates at 
December 31, 1997 ranging from 5.26% to 7.73%.


                                     F-58

<PAGE>   79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

CAPITAL ADEQUACY

Stockholders' equity increased in 1997 by $26.6 million, to $148.8 million.
This increase was a result of net income during the year, along with the net
increase in the fair value of available for sale securities which increased
stockholders' equity by $494,000, offset by dividends of $7.3 million paid to 
common stockholders.

                                    Equity
                                 (Thousands)
                                      
                                 [LINE CHART]
                                                                     
         94                          102,126          
         95                          110,919          
         96                          122,678          
         97                          148,822

Numbers exclude FASB 115 adjustment.

                             
                          Regulatory Capital Ratios
                              December 31, 1997
                                      
                                 [LINE CHART]

                       Leverage Ratio    Tier One Risk          Total Risk
                                       Based Capital Ratio   Based Capital Ratio
                      
F&M Bancorporation         8.65%                11.35%             12.58%
Well Capitalized           5.00%                 6.00%             10.00%
Adequately Capitalized     4.00%                 4.00%              8.00%


At December 31, 1997, the risk-based capital ratio for Tier 1 capital was 11.4%
and the total risk-based capital ratio was 12.6%, as compared to minimum
regulatory requirements of 4.0% and 8.0%, respectively. The ratio of average
equity to average assets amounted to 9.23% at December 31, 1997 compared with
9.44% at December 31, 1996 and 9.44% at December 31, 1995. The Company's
leverage ratio at December 31, 1997 was 8.7%, as compared to a minimum
regulatory requirement of 4.0%.

At December 31, 1997, the F&M subsidiary banks in the aggregate could have paid
approximately $45,483,000 of additional dividends to the Company without prior
regulatory approval. The payment of dividends is subject to the statutes
governing its subsidiary chartered banks. At December 31, 1997, each of the F&M
banks was in compliance with all applicable capital requirements, and
management believes that the capital structure of the F&M Banks is adequate.
The Company's common stock dividend payout ratio was 36.0% in 1997, as compared
to 35.2% in 1996 and 31.1% in 1995. These numbers include the dividends
historically paid by CSB, USB, WBC and CNB prior to their acquisitions by the
Company; differences in dividend policies affect the comparability of
information.

F&M's acquisitions of GCB, ETB, CLB, CNB, WBC, and BSW were, and its pending
acquisitions of BSC, and FMS are, stock for stock transactions, and therefore
additive to the Company's capital. The acquisitions which have been consummated
did not significantly affect F&M's capital ratios (and F&M does not expect the
pending acquisitions to do so). F&M's 1998 acquisition of SB was for cash,
financed through existing capital resources.

F&M did not incur any significant capital expenditures in 1997. The Company to
date has not committed to any major commitments to build or purchase in 1998 
but also expects to finance future expenditures through earnings and existing 
capital resources.



                                     F-59
<PAGE>   80


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


LIQUIDITY, INTEREST SENSITIVITY AND MARKET RISK MANAGEMENT

As shown in the Company's Consolidated Statement of Cash Flows for 1997, cash
and cash equivalents increased by $20.6 million during 1997 to $93.3 million at
December 31, 1997. The increase primarily reflected $130.1 million in net cash
provided by financing activities plus $24.5 million in net cash provided by
operating activities offset by $134.0 million in net cash used in investing
activities. Net cash used in investing activities consisted primarily of a net
increase in loans plus necessary capital expenditures. Net cash provided by
operating activities primarily consisted of the Company's net income in 1997,
increased by adjustments for non-cash charges. Net cash provided by financing
activities principally reflected a net increase in deposits and other
borrowings offset in part by payments on the Company's other borrowings, and
dividends paid.

The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views
liquidity as the ability to raise cash at a reasonable cost or with a minimum
of loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. At December 31, 1997,
the carrying value of securities maturing within one year was $41.3 million, or
13.4% of the total investment securities portfolio. The Company attempts, when
possible, to match relative maturities of assets and liabilities, while
maintaining the desired net interest margin. Although the percentage of earning
assets represented by loans is increasing, management believes that liquidity
is adequate.

A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company does not currently engage in the use of derivative
instruments. In addition, the Company has no market risk sensitive instruments
held for trading purposes.

The Company is, however, party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and credit card commitments. For additional detail
see Note 18 of Notes to the Company's Consolidated Financial Statements.

Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities. Managing interest rate risk is fundamental to banking.
Banking institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking lines of business to achieve
a desired interest rate sensitivity position and to limit their exposure to
interest rate risk. The Company manages its balance sheet to achieve maximum
shareholder value within the constraints of its interest rate risk discipline,
the maintenance of high credit quality, and sound leverage and liquidity
positions. Both the interest rate sensitivity and liquidity position of the
Company are reviewed regularly. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent in interest rate movements.

The Company's Asset and Liability Management Committee ("ALCO") attempts to
structure the Company's balance sheet to provide for an approximately equal
amount of rate sensitive assets and rate sensitive liabilities. In addition to
facilitating liquidity needs, this strategy assists management in maintaining
relative stability in net interest income despite unexpected fluctuations in
interest rates. The Company believes its market risk exposure, based on the
potential of near-term losses in future earnings, fair values, and cash flows
from reasonably possible near-term changes in market rates or prices is
acceptable at this time.


                                    F-60
<PAGE>   81

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)


A historical tool for measuring interest rate sensitivity is the gap analysis.
The following table shows the Company's approximate consolidated rate
sensitivity gap position at December 31, 1997.

<TABLE>
<CAPTION>
                                                      0-90         91-365            1-5         OVER 5
(dollars in thousands)                                DAYS           DAYS          YEARS          YEARS            TOTAL
------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>             <C>           <C>  
Loans                                             $347,082       $388,105       $393,360        $69,348       $1,197,895
Investment securities                               46,795         30,869         91,569        137,604          306,837
Other earnings assets                               36,171              0              0            576           36,747
------------------------------------------------------------------------------------------------------------------------
  Total rate-sensitive assets(RSA)                $430,048       $418,974       $484,929       $207,528       $1,541,479
========================================================================================================================
Savings deposits                                  $336,316             $0           $103        $12,111         $348,530
Time deposits                                      202,262        323,453        139,513             11          665,239
------------------------------------------------------------------------------------------------------------------------
Other non-deposit interest-bearing liabilities      47,913         35,029         14,400         11,272          108,614
------------------------------------------------------------------------------------------------------------------------
  Total rate-sensitive liabilities(RSL)           $586,491       $358,482       $154,016        $23,394       $1,122,383
========================================================================================================================
Interest sensitivity gap                         $(156,443)       $60,492       $330,913       $184,134         $419,096
========================================================================================================================
Cumulative interest sensitivity gap              $(156,443)      $(95,951)      $234,962       $419,096
========================================================================================================================
Ratio of cumulative rate sensitivity gap to RSA      (36.4)%        (11.3)%         17.6%          27.2%
Cumulative ratio of rate sensitive
  assets to rate sensitive liabilities                73.3%          89.8%         121.4%         137.3%
</TABLE>

Rate-sensitive liabilities in the preceding table exclude 50% of negotiable
order of withdrawal interest-bearing demand accounts and 70% of regular savings
accounts because management believes, based on the Company's previous
experience, that this treatment more closely approximates actual results due to
the relatively stable nature of these accounts. The F&M banks' regulators have
acknowledged these formulas for examination purposes.

Management's overall strategy is to coordinate the volume of rate-sensitive
assets and liabilities to minimize the impact of interest rate movements on the
net interest margin. The above table reflects a negative gap position for the
90-day interval with a positive position for the longer maturities. A negative
position is favorable in a falling interest rate environment; a positive
position is favorable in a

rising interest rate environment. The gap is within the acceptable range
established by management at each level of maturity. The December 31, 1997 net
interest margin decreased slightly to 4.71% from 4.78% for 1996. Since this is
a dynamic ratio, management has the ability to influence net interest income in
a positive manner when interest rate changes do occur.

The Company's rollover policy is such that loans are written with limited
maturities if they are not in conjunction with amortized payments or otherwise
tied to a variable rate. This allows the F&M banks to restructure the terms and
interest rate of the loan to correspond with the Company's cost of funds.

CHANGES IN ACCOUNTING PRINCIPLES

FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," in June 1996. The Company adopted
the provisions of SFAS No. 125 effective January 1, 1997. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. The statement provides guidelines for
classification of a transfer as a sale. The statement also requires liabilities
incurred or obtained by transferors as part of a transfer of financial assets
be initially recorded at fair value. Subsequent to acquisition, the servicing
assets and liabilities are to be amortized over the estimated net servicing
period.

FUTURE ACCOUNTING CHANGES

In June 1997, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income in a full set of general
purpose financial statements. This statement requires all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement requires
that an enterprise display an amount representing total comprehensive income
for the period in a financial statement, but does not require a specific format
for that financial statement. This statement also requires that an enterprise,
a) classify items of other


                                     F-61

<PAGE>   82

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

comprehensive income by their nature in a financial statement and, b) display
the accumulated balance of other comprehensive income separately from retained
earnings and surplus in the equity section of the balance sheet. The statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management, at this time, cannot determine
the effect that adoption of this statement may have on the consolidated
financial statements of the Company as comprehensive income is dependent on the
amount and nature of assets and liabilities held which generate nonincome
changes to equity.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It also amends SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the
special disclosure requirements for previously unconsolidated subsidiaries. The
statement is effective for fiscal years beginning after December 15, 1997. In 
the initial year of application, comparative information for earlier years is 
to be restated. The statement is not expected to have an effect on the 
financial position or operating results of the Company, but may require 
additional disclosures in the consolidated financial statements.

SUMMARY QUARTERLY FINANCIAL INFORMATION

The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.


<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                                      -----------------------------------------------------------------
                                                      MARCH 31               JUNE 30       SEPTEMBER 30     DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------
                                                                      (In thousands, except per share data)
1997                                              
<S>                                                   <C>                   <C>                 <C>             <C>
Interest income                                        $28,331               $30,238            $31,496         $32,482
Interest expense                                        13,361                14,200             14,869          15,415
Net interest income                                     14,970                16,038             16,627          17,067
Provision for loan losses                                  382                   873                643             928
Net income                                               4,685                 4,965              5,312           5,363
Earnings per share                                         .48                   .51                .55             .55

1996                                                                                           
Interest income                                        $23,424               $24,269            $25,129         $26,087
Interest expense                                        10,668                11,019             11,519          12,168
Net interest income                                     12,756                13,250             13,610          13,919
Provision for loan losses                                  434                   416                484           1,570
Net income                                               3,978                 3,856              4,334           3,238
Earnings per share                                         .45                   .43                .49             .36
</TABLE>                                                          
                                                                  
                                                    


                                     F-62
<PAGE>   83

                                   SIGNATURES

          PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                                 F&M BANCORPORATION, INC.


Dated March 24, 1998                             By:/s/  John W. Johnson
                                                    --------------------
                                                     John W. Johnson,
                                                     President and Chief 
                                                     Executive Officer
                                  -------------
                                POWER OF ATTORNEY

          KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John W. Johnson, Daniel E. Voet and Janet
M. Lakso, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any state securities commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

                                ---------------

          Pursuant to the requirements of the Securities Act of 1933, this
report has been signed by the following persons in the capacities and on the
dates indicated.*

                               SIGNATURE AND TITLE

            /s/ John W. Johnson                      /s/ Douglas A. Martin
-------------------------------------------       ---------------------------
John W. Johnson, President, Chief Executive       Douglas A. Martin, Director
              Officer and Director

          /s/ Daniel E. Voet                         /s/ Duane G. Peppler
-------------------------------------------       ---------------------------
Daniel E. Voet, Chief Financial Officer and       Duane G. Peppler, Director
Treasurer (also, Principal Accounting Officer)

                                               
                                            
           /s/ Gail E. Janssen                     /s/ Robert C. Safford    
-------------------------------------------       ---------------------------
 Gail E. Janssen, Chairman of the Board           Robert C. Safford, Director
              and Director
          
              /s/ Otto L. Cox                      /s/ Glenn L. Schilling
-------------------------------------------       ---------------------------
          Otto L. Cox, Director                   Glenn L. Schilling, Director

           /s/ Paul J. Hernke                        /s/ Joseph F. Walsh 
-------------------------------------------       ---------------------------
        Paul J. Hernke, Director                   Joseph F. Walsh, Director

-------------
*  Each of the above signatures is affixed as of March 24, 1998.


                                S-1

<PAGE>   84

                            F&M BANCORPORATION, INC.
                               (THE "REGISTRANT")

                                  EXHIBIT INDEX
                                       TO
                            1997 REPORT ON FORM 10-K

<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                               Filed
Number                                  Description                     By Reference                                 Herewith
------                                  -----------                     ------------                                 --------
<S>                           <C>                                       <C>                                           <C>
2.1                               Agreement and Plan of Merger dated                                                   X
                                  as of December 1, 1997 among the
                                  Registrant, BancSecurity
                                  Acquisition Corporation and
                                  BancSecurity Corporation*

                                                         
2.2                               Plan and Agreement of Merger and                                                     X
                                  Reorganization dated as of December
                                  31, 1997 by and among the
                                  Registrant, F&M Merger Corporation
                                  and Financial Management Services
                                  of Jefferson, Inc.*

                                               
3(i)                              Restated Articles of Incorporation,    Exhibit 3(i) to Registrant's Report
                                  as amended through May 7, 1996         on Form 10-Q for the quarter ended 
                                                                         March 31, 1996                     

3(ii)                             Bylaws, as amended through February    Exhibit 3.2 to Registrant's     
                                  4, 1994                                Report on Form 10-K for the year
                                                                         ended December 31, 1993 ("1993  
                                                                         10-K")  


10.1**                            Registrant's 1993 Incentive Stock      Exhibit A to Registrant's Proxy 
                                  Option Plan                            Statement for 1993 Annual Meeting 
                                                                         of Shareholders ("1993 Proxy Statement")

10.2**                            Registrant's 1993 Stock Option         Exhibit B to 1993 Proxy
                                  Plan for Non-Employee Directors        Statement              
</TABLE>

                                     EI-1

<PAGE>   85
<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                        Filed
Number                                  Description                     By Reference                          Herewith
------                                  -----------                     ------------                          --------
<S>                           <C>                                       <C>                                    <C>

10.3**                         Registrant's Executive Bonus Plan         Description thereof under
                                                                         "Compensation Committee
                                                                         Report on Executive    
                                                                         Compensation" in the   
                                                                         Registrant's Proxy     
                                                                         Statement for 1996     
                                                                         Annual Meeting of      
                                                                         Shareholders ("1996    
                                                                         Proxy Statement")      


10.4**                         Registrant's Deferred                     Exhibit 10.6 to        
                               Compensation Agreements with:             Registrant's Report on 
                                                                         Form 10-K for the year 
                                                                         ended December 31, 1992

   (a)                         Gail E. Janssen
   (b)                         Duane G. Peppler

10.5**                         Registrant's Officers' Stock              Description thereof under
                               Purchase Plan                             "Officers' Stock Purchase
                                                                         Plan" in 1996 Proxy      
                                                                         Statement  
                         
10.6                           Noncompetition Agreement dated            Exhibit 10.1 to the Registrant's
                               February 11, 1994 between the             Report on Form 8-K dated        
                               Registrant and Robert C. Safford          February 11, 1994

10.7 **                        Agreement dated November 4, 1993          Exhibit 10.1 to the Registrant's                         
                               between Pulaski Bank (n/k/a F&M Bank      Report on Form 8-K dated March 21, 
                               Northeast) and John W. Johnson            1994 ("3/21/94 8-K")  
                               [superseded] 

10.8a**                        Option Agreement dated                    Exhibit 10.2 to 3/21/94
                               March 17, 1993 between Pulaski            8-K
                               Bancshares, Inc. and John W.
                               Johnson, together with the
                               assumption thereof by the
                               Registrant dated March 21, 1994

10.8(b)**                      Employment Agreement between                                                     X
                               the Registrant and John W.
                               Johnson dated July 14, 1997
                               ("Johnson Employment
                               Agreement)

                                                         
10.8(c)**                      Amendment No. 1 to Johnson
                               Employment Agreement, dated                                                      X
                               November 3, 1997

</TABLE>
                                                         
                                      
                                     EI-2
<PAGE>   86
<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                        Filed
Number                                  Description                     By Reference                          Herewith
------                                  -----------                     ------------                          --------
<S>                           <C>                                       <C>                                    <C>
10.9                           Plan and Agreement of Merger              Exhibit 10.12 to 1995 
                               and Reorganization dated as of            10-K
                               February 22, 1996 by and among 
                               the Registrant, F&M Interim Bank 
                               and Community State Bank*        
                  
10.10                          Plan and Agreement of                     Exhibit 10.15 to F&M's  
                               Reorganization and Merger dated           Annual Report on Form   
                               as of February 27, 1997 among             10-K for the year ended 
                               the Registrant, Merger Corp. and          December 31, 1996       
                               Citizens National Bancorporation,         ("1996 10-K")           
                               Inc.*            

10.11                          Plan and Agreement of Merger              Exhibit 10.16 to
                               and Reorganization dated as of            1996 10-K
                               March 19, 1997 among the 
                               Registrant, Wisconsin Ban Corp. 
                               and F&M Merger Corporation* 

21                             List of Subsidiaries                                                             X

23                             Consent of Wipfli Ullrich Bertelson                                              X
                               LLP

24                             Power of Attorney (contained on                                                  X
                               the Signature Page)

27                             Financial Data Schedule                                                          X

</TABLE>

                                                         
------------------

*        Excluding schedules and exhibits, which are identified in such
         documents. The Registrant agrees to furnish supplementally a copy of
         any omitted schedule or exhibit to the Commission upon request.

**       Designates management contracts or compensatory plans or arrangements 
         which are filed as exhibits hereto.



                                                  
                                     EI-3