<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB/A

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

                   For the fiscal year ended December 31, 1998
                                       OR
 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                         Commission file number 0-18599

                             BLACKHAWK BANCORP, INC.
           WISCONSIN                                   39-1659424
   (State of Incorporation)                       (IRS Employer ID No.)

                    400 Broad Street, Beloit, Wisconsin 53511
                         Telephone Number (608) 364-8911

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE

           Securities Registered Pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $ .01 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
                  requirement for the past 90 days. Yes  X     No   .
                                                        ---      ---

 Check if there is no disclosure of delinquent filers in response to Item 405 of
 Regulation S-B not contained in this form, and no disclosure will be contained,
    to the best of registrant's knowledge, in definitive proxy or information
   statements incorporated by reference in Part III of this Form 10-KSB or any
                         amendment to this Form 10-KSB.

          Revenue for the year ended December 31, 1998 was $19,825,000

As of March 23, 1999, 2,315,317 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 23, 1999) of the shares
   held by non-affiliates (excludes shares reported or beneficially owned by
 directors and officers - does not constitute an admission to affiliate status)
                         was approximately $21,151,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference in the
  respective parts hereof indicated: 1. Proxy Statement and Annual Meeting of
              Stockholders, on May 19, 1999, dated April 3, 1999.

                   Index of Exhibits on Page 25. Page 1 of 51.
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                             BLACKHAWK BANCORP, INC.

                         FORM 10-KSB - TABLE OF CONTENTS


                                   PART I PAGE

Item 1 Business.............................................................  3

Item 2 Properties...........................................................  8

Item 3 Legal Proceedings....................................................  8

Item 4 Submission of Matters To a Vote of
      Security Holders......................................................  8

PART II

Item 5 Market for the Registrant's Common Stock and
      Related Stockholder Matters...........................................  8

Item 6 Management's Discussion and Analysis of
       Financial Condition and Results of
      Operations............................................................  8

Item 7 Financial Statements and Supplemental Data........................... 13

Item 8 Changes in and Disagreements with
       Accountants on Accounting and Financial
      Disclosure............................................................ 22

PART III

Item 9 Directors and Executive Officers of the
      Registrant............................................................ 22

Item 10 Executive
      Compensation.......................................................... 22

Item 11 Security Ownership Of Certain Beneficial
      Owners and Management................................................. 22

Item 12 Certain Relationships and Related
      Transactions.......................................................... 22

PART IV

Item 13 Exhibits, Financial Statement Schedules, and
      Reports on Form 8-K................................................... 22

Signatures.................................................................. 23










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                                     PART I

ITEM 1 BUSINESS

GENERAL. Blackhawk Bancorp, Inc., (the "Company"), was incorporated under the
laws of the state of Wisconsin in November 1989. The Company owns and operates a
subsidiary financial institution, Blackhawk State Bank ("Bank"), located in
Beloit, Wisconsin.

The Bank is a Wisconsin-chartered commercial bank operating five branches in the
Greater Beloit Area, three free-standing branches and two in-store branches. Six
additional free-standing branches are in the following cities: Belvidere (2),
Oregon (1), Rochelle (1), Rockford (1) and Roscoe (1). The Bank has three wholly
owned subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is an investment
subsidiary located in Las Vegas, Nevada. RSL, Inc., a second subsidiary whose
activities include the sale of mutual funds and annuities, and in turn owns
Midland Acceptance Corporation ("MAC"), a consumer finance company that has
offices in Rochelle and Rockford, Illinois. First Financial Services, Inc.
("FFSI"), the third subsidiary, sells, on an agency basis, mortgage-related
insurance products and a variety annuity products.

On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., was an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. merged into the charter of Blackhawk
State Bank.

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.

Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of purchase.

The principal sources of funds for the Bank's lending activities are deposit
accounts, amortization and prepayment of loans, short-term borrowings, and funds
provided from operations. The principal sources of income are interest and fees
on loans, interest on investments and non-interest income, consisting of fees
for servicing loans, service charges, trust department fees and income from
retail non-deposit investment sales.

LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the real
estate securing the mortgage loans is located within thirty minutes of the
Bank's offices. Previously, Management of the Company has restructured the loan
portfolio of the Greater Beloit Area Bank to decrease the concentration of
mortgage loans and increase commercial and installment loans. Management of the
Company anticipates the restructuring of the loan portfolio of the acquired
institutions. The Analysis of Loan Portfolio, Table 2 of Item 7, shows the
changes in the types of loans from 1996 through 1998.

Commercial loans are either collateralized by assets other than real estate or
are unsecured. Interest rates on commercial loans are generally tied to an index
adjustable monthly and therefore more rate sensitive than mortgage loans.
Consumer and installment loans are generally secured by automobiles, boats, or
junior liens on real estate. A substantial percentage of automobile and boat
loans in the portfolio were purchased from area dealers.
The Bank also offers credit cards and home equity lines of credit.

Approximately $130 million in single one-to-four family loans are serviced for
others. These were acquired through the purchase transactions mentioned above.
Substantially all of these loans are 100% sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). MAC is a sub-prime lender, and has approximately
$2.0 million in outstanding loans.







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INVESTMENT ACTIVITIES. The investment policy under which the Company and its
subsidiary operates normally limits investments to: 1) U.S. Treasury and
government agency securities with maturities of 5 years or less; 2)
mortgage-backed securities, limited to no more than 30% of the investment
portfolio, with an average life of 5 1/2 years or less; 3) municipal securities
rated "A" or better, unless they are tax-anticipation notes issued by Wisconsin
issuers whose long-term debt is rated at least "A" or if unrated, are judged by
management to possess investment characteristics comparable to "A" rated debt
securities; and 4) corporate bonds and notes rated "A" or better with a maturity
of 4 years or less.

Security investments made to a single entity are limited to 20% of its capital
and surplus. This limitation does not apply to investments in obligations of the
United States Treasury, Federal Land Banks, Federal Home Loan Banks, Federal
Farm Credit Banks, Federal National Mortgage Association, Export-Import Bank of
Washington or obligations fully and unconditionally guaranteed by the United
States. It is the Company's and its subsidiary's intention to hold securities
until maturity and are classified as such for IRS purposes. Generally, the
recently purchased securities held by the Company, the Bank and Nevahawk are
classified as available-for-sale.

Of the Bank's portfolio, approximately $9.0 million is managed at its main
office. Another $18 million is managed by the Belvidere office. The Bank may
purchase the same types of securities under the same general restrictions as are
noted above. In addition, commercial paper, bankers acceptances and bank
certificates of deposit are authorized investments to provide additional
liquidity in the investment portfolio.

During 1991, Beloit transferred approximately $21.5 million worth of its
investment securities to Nevahawk, it's wholly-owned subsidiary located in Las
Vegas, Nevada. Currently, the portfolio under management by Nevahawk is
approximately $25.0 million. The transfer of an additional $7 million is
anticipated in March 1999.

The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above. At December 31, 1998, securities held by the
Company were minimal.

DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and
non-interest bearing. Non-interest bearing deposits consist of checking accounts
of individuals and non-personal entities. The interest-bearing deposits include
savings accounts, money market deposit accounts, certificates of deposit,
individual retirement accounts, NOW accounts and check club accounts. The Bank
has few depositors with account balances in excess of $100,000. During 1997
Beloit acquired approximately $1.0 million in brokered deposits which mature
July 1999. The Bank attracts deposits by offering competitive interest rates for
interest-bearing accounts and services on a competitive basis for non-interest
bearing accounts.

TRUST SERVICES. Through a separate department the Bank provides personal trust
services, including acting as trustee for living and testamentary trusts, and as
an agent, custodian, guardian, conservator, personal representative or
administrator for individuals or their estates. Trust offices are maintained at
the Bank's main location in Beloit, Wisconsin.

OTHER SERVICES. The Bank provides a wide range of other banking services for
both retail and commercial customers. It also provides full-service brokerage
services through Raymond James Securities, Inc. in three locations.

COMPETITION. Banks experience intense competition in both attracting and
retaining deposits and in making loans. The Bank's direct competition for
deposits has come from other commercial banks, savings and loan associations,
credit unions, mutual funds and stock brokerage firms. In addition to offering
competitive types of accounts and interest rates, the principal methods used by
the Bank to attract deposits included the offering of a variety of services,
convenient business hours, and branch locations.

Competition in making real estate loans comes principally from savings and loan
associations, mortgage companies and other commercial banks. Consumer loans
provided by credit unions, finance companies and other commercial banks provide
the competition in this area. Other commercial banks are the major competition
for commercial loans.

EMPLOYMENT. As of December 31, 1998, the Company and the Bank had 164 employees,
of which 114 were employed on a full time basis. The fringe benefits generally
provided to qualified employees include health insurance,






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long-term disability insurance, a flexible compensation plan (cafeteria plan), a
401k deferred compensation and profit-sharing plan. Management considers its
relations with employees to be excellent.

SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulations may have a material effect on the Company.

THE COMPANY. On March 27, 1990, the Company received approval from the Federal
Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), to become a registered bank holding company by acquiring all of
the capital stock of the Bank. As a result, since consummation of the Conversion
on May 16, 1990, the Company's activities have been subject to limitations
imposed under the BHC Act. Transactions between the Company and the Bank and
their affiliates are also subject to certain restrictions. As a registered bank
holding company, the Company is subject to various filing requirements of the
FRB and is also subject to examination by the FRB.

FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation which allows bank holding
companies from states that have adopted reciprocal legislation (the "Reciprocal
States") to acquire banks in Wisconsin, and allows Wisconsin bank holding
companies to acquire banks in the Reciprocal States. The Reciprocal States
presently include Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and
Ohio.

Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company also acquired the outstanding stock of Midland, which is a
finance company, and as such is an activity closely related to banking
activities. The Company does not have any other current plans to seek approval
to acquire any of these bank related activities. However, it may determine to do
so in the future. Much conflict has arisen in this area of the law and
regulations. In some instances regulators are authorizing activities allowed
under the law and stated above.

The FRB has adopted capital guidelines as to both minimum levels of core capital
and risk-based capital. The minimum core capital requirement ranges from 3% to
5% of total assets depending upon the regulator's determination of the holding
company's strength. The guidelines assign risk weightings to assets and
off-balance sheet items, and have minimum risk-based capital ratios. All bank
holding companies are required to have total consolidated capital of 8% of
risk-weighted assets. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the reserve for loan losses. Table 12,
filed elsewhere in this report, reflects various regulatory measures of capital
as of December 31, 1998. The Company's core and risk-based capital ratios, as
shown in the table are well above the minimum levels.

Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "Commissioner"). The Commissioner is
also empowered to issue orders to a bank holding company to remedy any condition
or policy which, in the opinion of the Commissioner, endangers the safety of
deposits of any subsidiary state bank or trust company. In the event of
non-compliance with such an order, the Commissioner has the power to direct the
operations of the state bank or trust company and to restrict dividends paid to
the bank holding company.

THE BANK. Wisconsin-chartered banks, including the Bank, are regulated and
supervised by the Wisconsin Department of Financial Institutions. Each
Wisconsin-chartered bank is required to be examined at least once each year by
either the Commissioner or its primary federal regulator. The approval of the
Commissioner is required to establish or close branches, merge with other banks
and undertake many other activities.






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Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove directors, officers or employees who have violated the law, conducted the
bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests or been negligent in the performance of their duties.

Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.

Under Wisconsin law, the Commissioner has the authority, by rule or order, to
grant Wisconsin state banks the power to conduct any financial service which is
being offered by any other financial-related institution; under those
provisions, the Commissioner has approved banks engaging in general insurance
agency services and securities brokerage services. Each of the above services is
not a permitted activity of bank holding companies or bank holding company
subsidiaries. The FRB has generally not asserted jurisdiction over the powers of
state-chartered bank subsidiaries of bank holding companies.

PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account (as defined under Wisconsin law). If, on the date of declaration of a
dividend on common stock, the ratio of capital stock and surplus to total
deposits is less than 10%, there must be a transfer from net profits to the
surplus account before the dividend may be paid. Based on the Bank's strong
financial position, its entire earnings each year could be paid out as
dividends.

Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay dividends
in 1999. This status will be reviewed by Nevahawk at its regular board meetings.

FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $100,000 per insured depositor. The FDIC imposes an annual assessment
on deposits. Effective January 1, 1993, premiums are assessed on the basis of a
risk rating assigned by the FDIC. Since that time the Bank's premium has been at
the lowest available rate. Beginning in 1997, financial institutions insured by
the FDIC are required to contribute to the FICO bond refinancing. This is
expected to occur through the year 2003. The deposits acquired with the
purchases of Rochelle and Belvidere will continue to be assessed at the higher
thrift rate.

The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.

As an FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may revalue
assets of an insured institution and require establishment of specific reserves
in amounts equal to the difference between such revaluation and the book value
of the assets. In addition, the FDIC has adopted regulations regarding capital
adequacy requirements similar to those of the FRB.

OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party






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transactions, management interlocks, community reinvestment, truth-in-lending,
electronic funds transfers, truth-in-savings and equal credit opportunity.

Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national and
state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.

Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably

GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the Bank
and the Company are affected not only by general economic conditions but also by
the policies of various governmental regulatory authorities. In particular, the
FRB influences general economic conditions and interest rates through the
regulation of money and credit conditions. It does so primarily through
open-market operations in U.S. Government Securities, varying the discount rate
on member and nonmember bank borrowings, and setting reserve requirements
against bank deposits. FRB monetary policies have had a significant effect on
the operating results of banks in the past and are likely to continue to do so
in the future. The general effect, if any, of such policies upon the future
business and earnings of the Bank cannot be accurately predicted. In addition,
losses sustained by the federal insurance funds and regulatory costs incurred in
connection with failed or failing insured depository institutions continue to be
assessed to those within the industry. As such, future earnings will be
adversely affected by regulations enacted to cover these losses and costs. Past
increases in FDIC insurance premiums are an example of this.

EXECUTIVE OFFICERS

                      NAME AND AGE             PRINCIPAL OCCUPATION
                      ------------             --------------------
                  Dennis M. Conerton, 48    President and Chief Executive
                                            Officer of the Company and
                                            of the Bank. Prior thereto,
                                            Vice President-Controller,
                                            Regal-Beloit Corporation.

                  James P. Kelley,  55      Executive Vice President and
                                            Secretary of the Company
                                            and Executive Vice President of
                                            the Bank and the Bank's
                                            predecessor, Beloit Savings Bank.











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                  Jesse L. Calkins, 58      Senior Vice President, Treasurer and
                                            Chief Financial Officer of the
                                            Company and Senior Vice President of
                                            the Bank, and the Bank's
                                            predecessor, Beloit Savings Bank.

                  Richard J. Rusch, 54      Vice President Commercial Lending of
                                            the Bank since August 1990. Prior
                                            thereto, Vice President Commercial
                                            Loans, M & I Bank of Beloit.

                  David A. Stearns, 52      Senior Vice President of the Bank
                                            (October 1998 to Present); President
                                            and Chief Executive Officer of the
                                            Castle Bank Harvard, N.A., Harvard,
                                            IL (1995 - 1997); President and
                                            Chief Executive Officer of the
                                            Harris Bank Woodstock, Woodstock, IL
                                            (1992 - 1995).

ITEM 2.  PROPERTIES

         On December 31, 1998, the Company had eleven locations, of which three
         were leased. All of these offices are considered by management o be
         well maintained and adequate for the purpose intended. See the Notes to
         Consolidated Financial Statements included under Item 7 of this
         document for further information on properties.

         ITEM 3.  LEGAL PROCEEDINGS

         To management's knowledge no material legal proceedings are
         contemplated or pending to which it or its affiliates are or threatened
         to be a party, of which any of their property would be subject, other
         than routine litigation incidental to its business.

         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 1998.


                                     PART II

         ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDERS
         MATTERS

         As of March 23, 1999 there were 372 Registered Stockholders.
         Information in response to this item is found on page of this report. A
         able listing the declaration of dividends is found on page 28 of the
         Company's Annual Report, and is incorporated herein by reference.

         ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATION

         Management's Discussion and Analysis of Financial Condition and
         Result's of Operation

         The following discussion provides additional analysis of the Company's
         financial statements presented in its annual report and should be read
         in conjunction with this information. This discussion focuses on the
         significant factors which affected the Company's earnings in 1998, with
         comparisons to 1997 and 1996 where applicable. As of December 31, 1998,
         Blackhawk State Bank (the "Bank") was the only direct subsidiary of the
         Company and its operations contribute nearly all of the revenue and
         expenses for the year. The Bank has three wholly owned subsidiaries.
         Nevahawk Investment, Inc. ("Nevahawk") is an investment subsidiary
         located in Nevada. RSL, Inc., which operates mutual fund and annuity
         activities, and in turn owns Midland Acceptance Corp. ("MAC"), a
         consumer finance company that has offices in Rochelle and Rockford, IL.
         First Financial Services of Belvidere, Inc. ("FFSI") administers and
         sells, on an agency basis, mortgage-related insurance products and
         sells on an agency basis a variety of annuity products.

         Overview







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On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., was an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. merged into the charter of Blackhawk
State Bank.

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.

Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of the purchase.

Results of operations of Rochelle and Belvidere are incorporated in the
Company's statements from the respective acquisition dates forward.

Net interest income
Net interest income ("Interest Margin") is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of income amounts and
rates are on a tax-equivalent basis, which accounts for income earned on loans
and securities, which are not fully subject to income taxes as if they were
fully subject to income taxes. Interest Margin in 1998 was $8.9 million,
increasing 16.5% over the 1997 level of $7.7 million, which was 26.2% higher
than the 1996 level of $6.0 million. Interest margin as a percent of average
earning assets ("Interest margin rate") was 4.24% in 1998, 4.52% in 1997 and
4.33% in 1996. The decrease between 1998 and 1997 is the result of the addition
of the Belvidere operations, which had a lower interest margin rate than the
Company and the downward trend in overall interest rates during the later part
of 1998.

Interest income and fees on loans is the largest component of interest income
and was the largest factor in the 21.4% increase in interest income during 1998.
Each loan category had an increase in average balances as compared to 1997, the
result of the acquisition of Belvidere. The yield earned on loans decreased to
9.10% in 1998 compared to 9.25% in 1997. Loan yields have been adversely
affected by the decrease in overall market rates and the addition of Belvidere
loans, which are predominately one-to-four family mortgage loans earning lower
yields.

Interest income and fees on loans increased 32.1% and was the largest factor in
the increase of interest margin in 1997 compared to 1996. The interest income in
each of the major loan categories increased in 1997 compared to 1996 primarily
due to the Company's acquisition of Rochelle. Increased rates also contributed
to a lesser extent to an increase in consumer loan interest. Total loan volumes
increased 38.5% for this same period.

Investment income increased 12.8%, to $2.9 million in 1998 compared to $2.6 in
1997. Average balances for both types of investment securities were higher in
1998 when compared to 1997. The Company reinvested maturities from taxable
securities to tax-exempt securities to take advantage of the favorable spread
between these two investment types. The average balances of taxable investment
securities were also affected by the Belvidere acquisition. The yield on taxable
investment securities fell to 6.31% in 1998 from 6.52% in 1997, mostly due to
lower overall market rates.

Investment income increased 4.1%, to $2.6 million in 1997 compared to $2.5
million in 1996. The increase during this period was primarily the result of
increased rates on taxable securities, which offset the reduced income from
tax-exempt securities. Income from tax-exempt securities declined due to lower
volume. The average balance of total investments decreased by 3.0% in 1997
compared to 1996, as the Company liquidated investment securities to purchase
Rochelle. The decline in volume of tax exempt securities was only partially
offset by the increase in volume of taxable securities.

Total interest expense was $8.5 million in 1998, increasing 27.0% from $6.7
million in 1997. Increased volumes are the primary factors for this increase.
These increased volumes are attributable to growth of the Bank's deposit base,
the acquisition of deposits from Belvidere and the use of borrowings to complete
the Belvidere transaction. This increase due to volumes was partially offset by
lower rates paid on deposits. The average rate paid on deposits decreased to
4.63% in 1998 compared to 4.70% in 1997.

Interest expense totaled $6.7 million in 1997 compared to $5.4 million in 1996,
representing an increase of 24.7%. The increased interest cost was primarily the
result of higher deposit volume acquired with the purchase of Rochelle. The
average rate of interest on deposits remained relatively static at 4.70% and
4.71% in 1997 and 1996, respectively. The variance in interest expense between
1997 and 1996 in






                                       9
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other borrowings was primarily the result of reduced volume. However, the
average cost of borrowings also declined in 1997 to 4.77% compared to 4.80% in
1996.

Other Operating Income and Expenses
Other operating income increased 62.7% to $2.5 million in 1998 from $1.5 million
in 1997. Gain on sale of loans and mortgage loan servicing income were the most
significant factors in the increase. With the acquisition of Rochelle and
Belvidere, the Company acquired approximately $130.0 million of mortgages
serviced for others. As part of the servicing arrangement, the Company retains a
portion of the interest collected as a servicing fee. The other major categories
of other operating income also increased significantly when comparing 1998 to
1997. Trust fees increased 19.6% and service charges and fees increased 22.2%
between periods. The increase in trust fees was the result of a larger volume of
assets under management and a higher market value of assets under management.
The increase in service charges and fees was largely attributable to the
Belvidere acquisition.

Other operating income increased 52.7% to $1.5 million in 1997 from $1.0 million
in 1996. Service charges and fees represented more than half of the total in
each year. They also represented $330,000 of the $530,000 increase in other
operating income. Most of the increase in service charges resulted from the
inclusion of the Rochelle operations. Loan servicing fees accounted for $95,000
of additional income in 1997. Trust fees and investment center commissions
experienced significant percentage gains in 1997 compared to 1996. Other
operating expenses increased 31.3% to $7.8 million in 1998 from $5.9 million in
1997. Inclusions of Rochelle for a full year and Belvidere for four months in
1998 along with the amortization of purchased intangibles were the biggest
factors in the increase. Also contributing to the increase was the fact that the
Bank opened an in-store facility in July 1997 and a stand-alone branch in the
Northern Illinois market in March 1998. Some areas of expense such as data
processing and professional fees did not increase as much as overall expenses.
This was the result of efficiencies gained as a result of merging charters and
merging of the data processing system of Rochelle's into Beloit's.

Operating expense increased 40.5% to $5.9 million in 1997 compared to 1996. The
most substantial portion of this increase was the result of the Rochelle
purchase. In addition, the opening of a second in-store facility in a newly
constructed Wal-Mart SuperCenter contributed to some of the increase. Other
operating expense increased $185,000 or 4.6% in 1997 compared to 1996. Increases
in salaries, employee benefits, data processing and other expenses were
partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.

Management monitors three ratios related to other operating income and expense:
(1) Net other operating expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net other operating expense to
average assets improved to 2.29% in 1998 from 2.39% in 1997 but did not attain
the 1996 level of 2.16%. Considering all assets under management (mortgage loans
serviced for others and managed trust assets) this ratio decreased for the third
consecutive year, and was 1.56% in 1998, compared to 1.79% in 1997 and 1.96% in
1996. The standard efficiency ratio (other operating expense divided by net
interest income plus other operating income) increased to 68.8% in 1998,
compared to 64.8% in 1997 and 60.8% in 1996. Adjusted for intangible
amortization, the ratio increased to 65.6% in 1998 compared to 63.3% in 1997 and
60.8% in 1996. The gross efficiency ratio (other operating expense divided by
interest income plus other operating income) increased to 39.1% in 1998 compared
to 37.3% in 1997 and 34.2% in 1996. Adjusted for intangible amortization the
ratio increased to 37.2% in 1998, compared to 36.4% in 1997 and 34.2% in 1996.

The downward trend in the efficiency ratios was expected, and is attributable to
the newly acquired operations that are not fully integrated into the Company and
to the additional branch office locations. These operations should begin to have
a positive impact on the efficiency ratios as they continue to increase their
customer base. The efficiency ratios were also negatively impacted because of
lower market interest rates and Belvidere's lower relative margin as compared to
the Company's overall margin.

Provisions For Losses
The provision for loan losses was $315,000, $192,000 and $145,000 for 1998,
1997, and 1996, respectively. In 1998, the Bank had net charge-offs of $374,000,
(total charge-offs of $395,000 less recoveries of $21,000), compared to 1997
when it had net charge-offs of $176,000, (total charge-offs of $215,000 less
recoveries of $39,000). In 1996, Beloit experienced net recoveries of $112,000.
The net recovery in 1996 resulted from recoveries of $221,000 off-setting
charge-offs of $109,000. Most of the recovery was from a loan that was
originally charged off in 1994. Excluding the large recovery, net charge-offs to
average loans would have been .07% in 1996. Net charge-offs to average loans was
 .24% in 1998 and .14% in 1997.

The allowance for loan losses as a percent of loans was 1.08% at December 31,
1998 compared to 1.11% at December 31, 1997 and to 1.19% at December 31, 1996.
This downward trend is attributable to a shift in the Company's loan mix. With
the acquisition of Rochelle and Belvidere, the Company has a higher proportion
of one to four family mortgages, which generally are lower risk loans.
Management feels that the allowance for loan loss provision is adequate based
upon the current portfolio and market conditions. As the loan portfolio shifts
and market conditions warrant, the provision may be adjusted.








                                       10
<PAGE>   11

Income Taxes
The effective income tax rate increased to 37.2% in 1998 from 35.3% in 1997 and
32.9% in 1996. The most significant reason for the increase in 1998 and 1997 is
that the amortization of intangible assets, resulting from the acquisitions, is
not deductible for tax purposes. In addition, the Company has invested less in
municipal securities exempt from Federal taxes during 1997, as yields on taxable
securities have become more favorable. During 1998, yields on tax-exempt
securities were more favorable and therefore the Company reinvested maturing
bonds into tax-exempt securities to take advantage of this difference. Because
Nevahawk is located in Nevada, its income is not subject to state income tax.
Therefore, as a higher proportion of income is earned outside of Nevada, the
effective rate increases. The income generated in Illinois was subject to
Illinois income tax as well as federal income tax. The Illinois and Wisconsin
effective tax rates are approximately the same.

Balance Sheet Analysis
Total assets as of December 31, 1998 were $291.5 million increasing 44.3% from
$202.0 million as of December 31, 1997. Total average assets were $229.9 million
for the year ended December 31, 1998 compared to $183.1 million for the year
ended December 31, 1997, representing an increase of 25.6%. Most of the increase
was the result of the Belvidere acquisition.

Cash and Cash Equivalents
Most of the increase in cash and cash equivalents was the result of the
Belvidere acquisition. Also contributing to the increase was the addition of a
new branch in March 1998, and increased cash items in collection (cash letters).
As a percent of average assets, cash and cash equivalents have remained
relatively static.

Federal Funds Sold And Other Short-term Investments
The increase in federal funds sold and other short-term investments ("fed
funds") is mostly attributable to Belvidere. Belvidere is holding additional fed
funds in anticipation of possible deposit runoff from a certificate of deposit
special scheduled to mature during the first quarter of 1999. Depending on the
runoff amount, the remainder of fed funds will be invested into longer-term
securities. As a percent of average assets, fed funds increased to 3.0% during
1998 as compared to 1.5% in 1997.

Securities
The increase in securities is mostly attributable to the Belvidere acquisition.
Without the acquisition, security balances would have declined in 1998 as
compared 1997. As a percent of average assets, securities decreased to 19.7% in
1998 compared to 21.4% in 1997. It is expected that the average balance of
securities will increase in 1999. As previously discussed, the Company shifted
maturing investments from taxable securities to tax-exempt securities. Given the
current rate environment, this shift is expected to continue.

Loans
Again, the increase in loan balances is the result of the Belvidere acquisition.
Without the acquisition, loan balances would have decreased when comparing 1998
to 1997. This was the result of a very competitive environment in all loan
categories. Many real estate customers took advantage of low fixed-rate
mortgages and refinanced their adjustable-rate mortgages. The Bank has
traditionally kept adjustable-rate mortgages in its portfolio while selling
fixed rate mortgages to the secondary market. The installment loan market is
also very competitive, with consumers having many financing options available to
them. Average loans decreased slightly as a percent of average assets to 66.8%
in 1998 compared to 67.7% in 1997. It is expected that average loan balances as
a percent of average assets will increase during 1999.

Non-Performing Loans
Non-performing loans as a percent of total loans increased to 1.45% as of
December 31, 1998 from .77% as of December 31, 1997. Most of this increase is
the result of higher impaired loans. Impaired loans are those loans that are not
necessarily past due or non-accruing, but collection of interest is not assured.
The average balance of impaired loans also increased $634,000 in 1998 compared
to $405,000 in 1997. It is the Company's policy to place a loan on non-accrual
once it has become 90 days delinquent or if it is determined that collection is
questionable. As the level of consumer and commercial loans increase, wider
fluctuations for non-performing loans may occur.

Deposits
Total deposits increased to $241.4 million in 1998 from $159.1 million in 1997,
mostly the result of the Belvidere acquisition. Without the acquisition, average
deposits would have increased 4.4%. Average deposits increased to $163.5 million
in 1998 from $126.3 million in 1997. The biggest increase in average balances
was in savings accounts, which include money market account funds. The mix of
deposits as a percent of average assets experienced very little shift comparing
1998 to 1997. During 1999, the mix of deposits is expected to be weighted more
towards time deposits. The Company is planning to shift this mix closer to that
of a traditional commercial bank, which would be away from higher interest time
deposits.

Total non-interest bearing demand accounts increased due more to growth in
existing accounts and less because of the Belvidere acquisition. As a percentage
of average assets, non-interest bearing demand accounts were 9.5% in 1998 versus
9.0% in 1997. The




                                       11
<PAGE>   12

Company plans to increase business relationships in the Rochelle and Belvidere
markets, which over time should increase the balance in these accounts.
Traditionally, neither Rochelle nor Belvidere sought commercial deposits.

Other Borrowings

Other borrowings increased to $21.7 million in 1998 versus $17.1 in 1997. The
majority of this growth was the result of borrowings of $7.8 million used in
part to finance the acquisition of Belvidere. Approximately, $6.0 million of
this borrowing is at a fixed rate, requiring principal and interest payments of
approximately $900,000 per year for five years. An additional $1.8 million bears
interest at a variable rate based upon the monthly LIBOR rate. At the end of
five years, both parts of the loan are due. At the Company's discretion, part or
all of variable portion could be converted to the fixed rate or paid without
penalty. This loan is secured with the stock of the Bank. Other long-term
borrowings also increased as a result of additional Federal Home Loan Bank
(OFHLBO) borrowings and FHLB borrowings assumed in the Belvidere acquisition.
The Bank took additional FHLB borrowings early in 1998 to meet current and
projected liquidity needs.

Short-term borrowings consist of repurchase agreements and fed funds purchased.
From time-to-time the Bank will buy fed funds to meet short-term liquidity needs
and to manage its Federal Reserve Bank account. The average balance of
short-term borrowings decreased considerably during 1998. This was the result of
fewer customers using repurchase agreements to invest their excess funds. No
significant change is expected during 1999.

Asset/Liabilities Management
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest earning assets. Interest rate risk occurs when there is an imbalance
between the interest earning assets and the interest bearing liabilities at a
given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets than
liabilities maturing or repricing within the same time frame.

Generally, in a negative gap position, net interest income will decline during
periods of rising interest rates and increase during periods of declining
interest rates. The opposite would be expected in a positive gap position.
However, with current interest rates at a historically low level, certain
liabilities are not as interest rate sensitive and therefore offset the earnings
change anticipated in the gap analysis. The Company's cumulative one-year gap
generally has been and currently is negative.

The Asset Liability Committee meets regularly to monitor and determine the
Company's exposure to interest rate fluctuations. Monitoring the maturities and
repricings of assets and liabilities, the flow of funds, and the relationship of
interest rate changes of loans and deposits to the general market does this. The
consolidated interest rate risk exposure is monitored by the Company on a
quarterly basis.

Liquidity
Liquidity as it relates to the subsidiary bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal source of funds are deposits, scheduled amortization and prepayment of
loan principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fed funds, sale of loans, sale
of securities, borrowing from the Federal Reserve Bank and the FHLB and capital
loans. Current year earnings can be paid to the Bank, from Nevahawk, to provide
additional liquidity, without incurring a tax liability under present law.
During 1998 and 1997 Nevahawk did not pay a dividend. A payment in 1999 is also
not anticipated.

Generally, the liquidity needs of the Company consist of payment of dividends to
its shareholders, the repayment of debt used for the Belvidere acquisition and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from cash balances, dividends from the Bank and a $2.0 million line of
credit with a non-affiliated third-party bank. To date, this line of credit has
not been used. Certain restrictions are imposed upon banks, which could limit
their ability to pay dividends if they do not generate future net earnings. The
Company maintains adequate liquidity to pay its expenses. In addition, the
Company may also borrow from external sources leveraging its strong capital
base.

Capital
Total shareholders' equity as of December 31, 1998 increased 5.5% to $24.4
million as compared to $23.1 million as of December 31, 1997. Internal growth in
the form of increased net income was the biggest factor for this increase. Also
contributing to the increase, to a lesser extent, was the exercising of stock
options by employees and an increase in the adjustment for Financial Accounting
Standard 115. Tier I capital ratio, total capital ratio and Tier I leverage
ratio were 8.36%, 9.31% and 6.00%, respectively, at December 31, 1998 compared
to 15.26%, 16.35% and 10.99%, respectively, at December 31, 1997. The change in
these ratios, between years, reflects the effect of the Belvidere acquisition in
which the Company chose to leverage its capital to complete the transaction. The
Company still exceeds all regulatory requirements regarding capital as the
regulatory requirement for Tier I capital as a percent of assets is 4.0% and for
total capital as a percent of risk based assets is 8.00%.








                                       12
<PAGE>   13

Impact of Inflation and Changing Prices
Unlike most industrial companies, most of the assets and liabilities of the Bank
are monetary in nature. Consequently, interest rates have more significant
impact on the Company's performance and results of operations than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously under
Asset/Liability Management, the Bank's interest rate gap position in conjunction
with the direction of the movement in interest rates, is an important factor in
the Company's results of operations. The Company's financial statements are
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars, without giving consideration to changes in the relative
purchasing power of money over time due to inflation.

Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
financial instruments be recognized as either assets or liabilities in the
statement of financial position. Derivative financial instruments not designed
as hedges will be measured at fair value with changes in fair value being
recognized in earnings in the period of change. If a derivative is designated as
a hedge, the accounting for changes in fair value will depend on the specific
exposure being hedged. The statement is effective for fiscal years beginning
after June 15, 1999. Management, at this time, cannot determine the effect the
adoption of this statement may have on the financial statements of the Company
as the effect is dependent on the amount and nature of derivatives and hedges
held at the time of adoption of the statement.

Year 2000 Issues
Year 2000 ("Y2K") issues affect the Company to the extent that it operates in an
industry which heavily relies upon information technology systems and has
material relationships with third parties, both vendors and customers.
Therefore, the Company has undertaken a four-phase process to determine to what
extent the Company is vulnerable to Y2K issues. The four phases set-forth by the
Company are awareness by major area, assessment of Y2K compliance, system
renovation (if necessary) and validation of Y2K preparedness. The Company's Y2K
progress, by major area, is set-forth in the table that follows.

<TABLE>
<CAPTION>
<S>               <C>               <C>              <C>                <C>              <C>
                  System            Awareness        Assessment        Renovation       Validation
                  General
                  Ledger            Complete         Complete           Complete         Complete
                  Loan
                  System            Complete         Complete           Complete         Complete
                  Deposit
                  System            Complete         Complete           Complete         Complete
                  Item
                  Capture           Complete         Complete           Complete         Complete
                  Hardware          Complete         Complete           In Process       June `99
                  Individual
                  Loan
                  Customers         Complete         Complete           Basis            Ongoing
</TABLE>


The Company has approved a budget for $600,000 for the cost of hardware and
software remediation. A majority of these costs were planned expenditures to
upgrade existing hardware and software regardless of Y2K. Most of these funds
have been expended and will be amortized over the useful life of the asset.

As is shown in the table, the Company has completed a majority of the validation
phase of several critical areas. A Y2K contingency plan has been formulated. The
validation processes completed indicate that mission critical systems are Y2K
compliant. If the results of the validation processes not yet completed lead
management to believe otherwise, then a contingency plan, with a timetable will
be implemented for those additional areas.

Because of the potential negative effect of Y2K non-compliance by some of the
Bank customers, the Bank has implemented an external Y2K awareness campaign that
provides them with information that will assist them in becoming compliant.
Requests have been sent to larger commercial customers to provide the bank with
information as to their status of compliance.

Private Securities Litigation Reform Act of 1995
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause




                                       13
<PAGE>   14


such a variance to occur include, but are not limited to, changes in interest
rates, levels of consumer bankruptcies, customer loan and deposit preferences,
and other general economic conditions

ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Incorporated by reference to pages 28 through 49 of this report on Form 10-KSB.

Following are supplemental data tables of the Company:
TABLE 1 RATE/VOLUME ANALYSIS
Years Ended December 31,

<TABLE>
<CAPTION>
          Average Balance             Average Rate                                                      Interest Earned or Paid
     1998       1997     1996     1998    1997    1996                                                   1998    1997     1996
<S>           <C>      <C>       <C>     <C>     <C>   <C>                                            <C>      <C>       <C>
                                                       Interest Earning Assets:
    39,313     35,778  35,510    6.31%   6.52%   5.98%   Taxable investment securities                 2,482    2,331    2,123
     5,992      3,394   4,862    6.53%   6.33%   6.66%   Tax-exempt investment securities                391      215      324

    45,306     39,172  40,372    6.34%   6.50%   6.06%     Total investments                           2,873    2,546    2,447

   153,600    125,403  95,042    9.10%   9.25%   9.24%   Loans                                        13,976   11,597    8,777
     6,948      2,678   3,957    5.39%   5.29%   5.05%   Federal funds sold & short term investments     375      142      200
     4,460      2,103      43    5.15%   4.09%   4.65%   Interest bearing deposits in banks              230       86        2

   210,315    169,356 139,414    8.30%   8.49%   8.20% TOTAL EARNING ASSETS                           17,453   14,371   11,426



                                                       Interest Bearing Liabilities:
    13,776     10,786   4,933    1.18%   1.40%   1.44%   Interest bearing demand deposits                162      151       71
    47,645     34,960  30,056    3.19%   3.05%   3.05%   Savings deposits                              1,519    1,065      917
   102,083     80,557  62,005    5.77%   5.85%   5.79%   Time deposits                                 5,888    4,715    3,590

   163,504    126,303  96,994    4.63%   4.70%   4.72%     Total interest bearing deposits             7,569    5,931    4,578

     6,897     11,651  12,411    5.28%   5.25%   5.18%   Short-term borrowings                           364      612      643
    10,795      2,999   2,754    5.60%   5.90%   6.28%   Long-term borrowings                            604      177      173

   181,196    140,953 112,159    4.71%   4.77%   4.81% TOTAL INTEREST BEARING LIABILITIES              8,538    6,720    5,394

                                 3.59%   3.72%   3.39% INTEREST RATE SPREAD

                                                       NET INTEREST MARGIN/
                                 4.24%   4.52%   4.33%    NET INTEREST INCOME                          8,915    7,651    6,032
</TABLE>


<TABLE>
<CAPTION>
                                                 1998 Compared to 1997                       1997 Compared to 1996
                                         Increase (Decrease) due to                  Increase (Decrease) Due to
                                                             Rate/                                       Rate/
                                           Rate     Volume   Volume     Net            Rate     Volume   Volume     Net
<S>                                         <C>       <C>      <C>       <C>           <C>        <C>       <C>     <C>
Interest Earning Assets:
  Taxable investment securities             (72)      230      (7)       151           191        16        1       208
  Tax-exempt investment securities            6       165       5        176           (16)      (98)       5      (109)
</TABLE>









                                       14
<PAGE>   15


<TABLE>
<S>                                          <C>      <C>       <C>      <C>            <C>    <C>         <C>    <C>
    Total investments                         (66)      395      (2)       327          175       (82)       6        99

  Loans                                      (189)    2,612     (45)     2,379           38     2,783       (2)    2,820
  Federal funds sold & short term               3       226       4        233           10       (65)      (3)      (58)
investments
  Interest bearing deposits in banks           22        97      25        143           (0)       96      (11)       84

TOTAL EARNING ASSETS                         (230)    3,330     (18)     3,082          222     2,732      (10)    2,945


Interest Bearing Liabilities:
  Interest bearing demand deposits            (24)       42      (7)        11           (2)       84      (3)        80
  Savings deposits                             50       386      18        454           (1)      150      (0)       148
  Time deposits                               (69)    1,260     (18)     1,173           39     1,074      12      1,125

    Total interest bearing deposits           (43)    1,688      (7)     1,638           36     1,308       9      1,353

  Short-term borrowings                         2      (250)     (1)      (248)           9       (39)     (1)       (31)
  Long-term borrowings                         (9)      460     (24)       427          (10)       15      (1)         4

TOTAL INTEREST BEARING LIABILITIES            (50)    1,899     (32)     1,817           35     1,284       8      1,326

NET INTEREST MARGIN                          (180)    1,431      14      1,265          188     1,448     (18)     1,618
</TABLE>



TABLE 2
ANALYSIS OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
(in thousands)                                                                      December 31,
                                                   1998                      1997                       1996
                                                              Percent of                Percent of                  Percent of
                                                   Amount       Total        Amount        Total        Amount         Total
<S>                                                <C>        <C>            <C>        <C>             <C>         <C>
Real estate-mortgage                                 130,924       72.58%       83,398        60.98%        55,475        56.33%
Real estate-construction                               3,535        1.96%        3,956         2.89%         1,343         1.36%
Real estate-held-for-sale                              4,362        2.42%        1,024         0.75%           240
Consumer                                              26,532       14.71%       25,006        18.28%        19,586        19.89%
Commercial                                            17,131        9.50%       25,333        18.52%        23,023        23.38%

Gross loans                                          182,484      101.16%      138,717       101.42%        99,667       100.96%

Unearned income                                        (180)      (0.10%)        (420)         0.00%      --               0.00%
Allowance for loan loss                              (1,915)      (1.06%)      (1,523)       (1.11%)       (1,186)       (1.20%)

Net loans                                            180,389      100.00%      136,774       100.00%        98,481        99.76%


</TABLE>

ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY

<TABLE>
<CAPTION>

                                                               Percent                   Percent                     Percent
                                                               of Gross                  of Gross                    of Gross
                                                               Loans by                  Loans by                    Loans by
                                                   Amount      Category      Amount      Category       Amount       Category
<S>                                                <C>         <C>          <C>          <C>            <C>          <C>
</TABLE>








                                       15
<PAGE>   16


<TABLE>
<S>                                                    <C>    <C>                <C>    <C>                  <C>    <C>
Real estate-mortgage                                     705    36.81%             545    35.78%               540    45.53%
Real estate-construction                                   0     0.00%               0     0.00%                 0     0.00%
Consumer                                                 644    33.63%             353    23.18%               173    14.59%
Commercial                                               566    29.56%             625    41.04%               473    39.88%
Commercial paper                                           0     0.00%               0     0.00%                 0     0.00%

Total                                                  1,915   100.00%           1,523   100.00%             1,186   100.00%
</TABLE>


SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                             December 31,
                                                    1997         1996         1996
<S>                                                 <C>          <C>          <C>
Allowance for loan losses, beginning                   1,523        1,186          929
Amounts associated with acquisition                      452          321
Amounts charged-off:
   Real estate-mortgage                                    1          110            0
   Consumer                                              180          104           98
   Commercial                                            214            1           11
     Total charge-offs                                   395          215          109


Recoveries on amounts previously charged-off:
   Real estate-mortgage                                    0            2            0
   Consumer                                               13           17           40
   Commercial                                              7           20          181
     Total recoveries                                     20           39          221
     Net charge-offs                                     375          176        (112)
Provision charged to expense                             315          192          145
Allowance for loan losses, ending                      1,915        1,523        1,186

NON-PERFORMING LOANS AT PERIOD END
Impaired loans                                         1,479          325          445
Non-accrual                                              857          610          443
Past due 90 days or more and still accruing              240          143          252
   Total non-performing loans                          2,576        1,078        1,140

RATIOS
Allowance for loan loss to period-end loans             1.08%        1.11%        1.19%
Net charge-offs to average loans                        0.24%        0.14%       (0.12%)
Recoveries to charge-offs                               5.06%       18.14%      202.75%
Non-performing loans to gross loans                     1.41%        0.78%        1.14%

EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized                                         33           34           30
Income that would have been recognized in                 76           78           52
  accordance with the original loan terms
</TABLE>



TABLE 3
OTHER INCOME AND EXPENSE





                                       16
<PAGE>   17
<TABLE>
<CAPTION>

                                                                Years Ended December 31,
                                   1998                           1997                           1996
                                                   % of                           % of                           % of
                                                 Average                        Average                        Average
(in thousands)                    Amount          Assets         Amount          Assets         Amount          Assets
<S>                               <C>            <C>             <C>            <C>             <C>            <C>
Non-interest expense                 7,757          3.37%           5,909          3.23%           4,214          2.83%
Non-interest income                  2,499          1.09%           1,536          0.84%           1,006          0.68%

Net non-interest expense             5,258          2.28%           4,373          2.39%           3,208          2.15%
</TABLE>


TABLE 4
Three-Year Comparison of Average Balance Sheets

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                              1998                      1997                      1996
                                                        Percent of                Percent of                 Percent of
(in thousands)                               Amount       Total        Amount       Total        Amount        Total
<S>                                          <C>           <C>         <C>        <C>           <C>          <C>
ASSETS:
   Federal funds sold
     and short term investments                6,948        3.02%        2,678        1.46%         3,957        2.66%
   Interest bearing deposits
    in banks                                   4,460        1.94%        2,103        1.15%            43        0.03%
   Taxable investment securities
    securities                                39,313       17.10%       35,793       19.55%        35,475       23.85%
   Tax-exempt investment
    securities                                 5,992        2.61%        3,394        1.85%         4,862        3.27%
  Loans, net of unearned
    income                                   153,600       66.82%      124,008       67.74%        94,034       63.23%

     Total earning assets                    210,315       91.49%      167,976       91.76%       138,371       93.04%

   Cash and due from banks                     7,988        3.47%        6,426        3.51%         5,196        3.49%
   Bank premises and equipment                 5,544        2.41%        4,305        2.35%         3,463        2.33%
   Other non-earning assets                    6,039        2.63%        4,361        2.38%         1,685        1.13%

     Total non-earning assets                 19,572        8.51%       15,092        8.24%        10,344        6.96%

TOTAL ASSETS                                 229,886      100.00%      183,068      100.00%       148,715      100.00%


LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
   Interest bearing demand                    13,776        5.99%       10,786        5.89%         4,933        3.32%
   Savings accounts                           47,645       20.73%       34,960       19.10%        30,056       20.21%
   Time deposits                             102,083       44.41%       80,557       44.00%        62,005       41.69%

    Total interest bearing
     deposits                                163,504       71.12%      126,303       68.99%        96,994       65.22%

   Short-term borrowings                       6,897        3.00%       11,651        6.36%        12,411        8.35%
   Long-term borrowings                       10,795        4.70%        2,999        1.64%         2,754        1.85%

    Total interest bearing
      liabilities                            181,196       78.82%      140,953       76.99%       112,159       75.42%
</TABLE>







                                       17
<PAGE>   18

<TABLE>
<S>                                          <C>           <C>         <C>          <C>         <C>          <C>
   Non-interest bearing deposits              21,941        9.54%       16,510        9.02%        13,725        9.23%
   Other liabilities                           3,252        1.41%        2,902        1.59%           957        0.64%

    Total liabilities                        206,389       89.78%      160,365       87.60%       126,841       85.29%

  Stockholders' Equity/Capital                23,497       10.22%       22,703       12.40%        21,874       14.71%

TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY                       229,886      100.00%      183,068      100.00%       148,715      100.00%
</TABLE>


TABLE 5
INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                      December 31,
                                             1998            1997           1996
<S>                                         <C>             <C>             <C>
Available-for-Sale
US Treasury                                      504          1,252           2,758
US Government Agency                          27,511          7,389           6,727
Tax-exempt obligations                           163              0               0
Other securities                              10,297            847           1,217

Total market value of
 investment securities                        38,475          9,488          10,702

Held-to-Maturity
US Treasury                                    5,058         10,191          11,403
US Government Agency                           8,895         13,900           9,341
Tax-exempt obligations                         8,135          4,341           3,118
Other securities                                   0            488           1,003

Total book value of
 investment securities                        22,088         28,920          24,865

Total market value of
 investment securities                        21,896         29,073          24,939

Total Securities                              60,563         38,408          35,567
</TABLE>


TABLE 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1998

<TABLE>
<CAPTION>
                                  Within                After One but          After Five but
                                 One Year               Within Five Years      Within Ten Years
                                  Amount     Yield      Amount      Yield      Amount     Yield
<S>                             <C>         <C>         <C>        <C>         <C>        <C>
Available-for-Sale
US Treasury                           504    6.06%            0     0.00%            0    0.00%
US Government Agency                3,453    5.47%       12,138     5.74%        2,048    6.25%
Tax-exempt obligations                  0    0.00%          161     5.93%            0    0.00%
Other securities                    7,193    5.54%        1,010     5.92%            0    0.00%
</TABLE>



<TABLE>
<CAPTION>
                                                                     No Fixed
                                     After Ten Years        Total    Maturity
                                     Amount      Yield     Amount     Yield      Amount      Yield
<S>                                  <C>       <C>        <C>        <C>         <C>         <C>
Available-for-Sale
US Treasury                                0     0.00%           0    0.00%          504      6.06%
US Government Agency                   9,872     6.21%           0    0.00%       27,511      5.91%
Tax-exempt obligations                     0     0.00%           0    0.00%          161      5.93%
Other securities                           0     0.00%       2,094    5.83%       10,297      5.63%
</TABLE>







                                       18
<PAGE>   19
<TABLE>
<S>                            <C>       <C>       <C>        <C>        <C>      <C>         <C>       <C>        <C>      <C>
Total                          11,150    5.54%     13,309     5.75%      2,048    6.25%       9,872     6.21%      2,094    5.83%


Held-to-Maturity
US Treasury                     2,992    7.57%      2,005     6.03%          0    0.00%           0     0.00%          0    0.00%
US Government Agency                0    0.00%        500     5.38%        502    5.80%       7,872     6.95%          0    0.00%
Tax-exempt obligations            235    4.70%      5,567     4.22%      2,223    4.38%           0     0.00%          0    0.00%
Other securities                    0    0.00%          0     0.00%          0    0.00%           0     0.00%          0    0.00%

Total                           3,227    7.36%      8,072     4.74%      2,725    4.64%       7,872     6.95%          0    0.00%

Grand Total                    14,377    5.95%     21,381     5.37%      4,773    5.33%      17,744     6.54%      2,094    5.83%
</TABLE>



TABLE 7
MATURITY AND INTEREST SENSITIVITY OF LOANS

<TABLE>
<CAPTION>
December 31,1998
                                                                                                            Greater than
(in thousands)                                 Time Remaining to Maturity                                     one year
                                                       After one                                        Fixed          Floating
                                   Due Within          but Within     After Five                       Interest        Interest
                                    One Year           Five Years        Years          Total            Rate            Rate
<S>                                <C>                 <C>            <C>             <C>              <C>              <C>
Real estate-mortgage                 38,268              52,697          23,076        114,041          68,530           7,243
Real estate-construction              3,886                  45               0          3,931              45               0
Consumer                             12,300              15,155             122         27,577          15,106             171
Commercial                           25,962              10,793               0         36,755          10,658             135

Gross Loans                          80,416              78,690          23,198        182,304          94,339           7,549
</TABLE>




TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID

<TABLE>
<CAPTION>

                                                               Years Ended December 31,
                                         1998                                  1997
                                        Average   Percent of     Average      Average    Percent of    Average
(in thousands)                          Balance      Total         Rate       Balance      Total        Rate
<S>                                    <C>         <C>           <C>       <C>          <C>           <C>
Non-interest bearing demand deposits     21,941      11.83%          --       16,510       11.56%         --
Interest bearing demand deposits         13,776       7.43%        1.18%      10,786        7.55%       1.40%
Savings deposits                         47,645      25.69%        3.19%      34,960       24.48%       3.05%
Time deposits                           102,083      55.05%        5.77%      80,557       56.41%       5.85%

Total                                   185,445     100.00%        4.63%     142,813      100.00%       4.70%
</TABLE>



TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID

<TABLE>
<CAPTION>

                                             Years Ended December 31,
                                         1996
                                        Average   Percent of     Average
(in thousands)                          Balance      Total         Rate
<S>                                   <C>         <C>            <C>
Non-interest bearing demand deposits     13,725      12.40%         --
Interest bearing demand deposits          4,933       4.46%        1.44%
Savings deposits                         30,056      27.15%        3.05%
Time deposits                            62,005      56.00%        5.79%

Total                                   110,719     100.00%        4.72%
</TABLE>




TABLE 9
MATURITY OF TIME DEPOSITS

<TABLE>
<CAPTION>

December 31, 1998                                             Time Remaining to Maturity
                                     Due Within       Four to            Seven to              After           Total
<S>                                  <C>              <C>                <C>                   <C>             <C>

</TABLE>


                                       19

<PAGE>   20

<TABLE>
<CAPTION>

                                    Three Months     Six Months        Twelve Months       Twelve Months
<S>                                 <C>            <C>                 <C>                 <C>            <C>
Certificates of Deposit
  Less than $100,000                    23,361         13,134              27,318              46,573         110,386
  More than $100,000                     5,174          2,631               3,016               6,649          17,470

Total                                   28,535         15,765              30,334              53,222         127,856

</TABLE>



TABLE 10

<TABLE>
<CAPTION>

Short-term Borrowings
                                                        1998        1997         1996
<S>                                               <C>              <C>          <C>
Balance outstanding December 31,
Repurchase agreements                                   4,576      10,256        7,405
Fed funds purchased                                         0       1,975            0
                                                  -------------------------------------
                                                        4,576      12,231        7,405
                                                  =====================================

Weighted rate December 31,
Repurchase agreements                                   4.51%       5.28%        5.01%
Fed funds purchased                                     0.00%       5.96%        0.00%
                                                  -------------------------------------
                                                        4.51%       5.39%        5.01%
                                                  =====================================

Maximum month-end outstanding balance
Repurchase agreements                                  11,387      17,038       17,202
Fed funds purchased                                     1,600       4,150        6,000


Year-to-date average amount outstanding
Repurchase agreements                                   6,411       1,087       11,970
Fed funds purchased                                       486      10,564          441
                                                  -------------------------------------
                                                        6,897      11,651       12,411
                                                  =====================================

Year-to-date average weighted rate
Repurchase agreements                                   5.20%       5.25%        5.16%
Fed funds purchased                                     6.34%       5.25%        5.71%
                                                  -------------------------------------
                                                        5.28%       5.25%        5.18%
                                                  =====================================

</TABLE>


TABLE 11

<TABLE>
<CAPTION>

Interest Rate Risk Analysis
                                                       Two-        Four-        Seven-       Ten-        Over
December 31, 1998                           One        three        six          nine       twelve       one
(in thous)                                 Month       months      months       months      months       year        Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>         <C>          <C>         <C>           <C>         <C>
Federal funds sold and
 short-term investments                    15,335                                                                    15,335
Interest bearing deposits                   8,190                                                                     8,190
Taxable investment securities               9,115       5,179       1,499          189         253      35,765       52,000
Tax-exempt investment
 securities                                     0           0           0            0         235       8,063        8,298
Loans                                      28,028       9,183      14,577       12,126      16,502     101,888      182,304

Total interest-earning assets              60,668      14,362      16,076       12,315      16,990     145,716      266,127

</TABLE>


                                       20

<PAGE>   21

<TABLE>
<S>                                       <C>         <C>         <C>          <C>         <C>          <C>         <C>
Interest bearing demand deposits           18,427                                                                    18,427
Savings deposits                           61,206                                                                    61,206
Time deposits                               7,724      20,811      15,765       14,566      15,768      53,222      127,856
Repurchase agreements and fed
 funds purchased                            4,576                                                                     4,576
Long-term borrowings                          800                                                       16,323       17,123

Total interest-bearing liabilities         92,733      20,811      15,765       14,566      15,768      69,545      229,188

Net gap                                   (32,065)     (6,449)        311       (2,251)      1,222      76,171       36,939
Cumulative Gap                            (32,065)    (38,514)    (38,203)     (40,454)    (39,232)     36,939
% of total assets                         (11.00%)    (13.21%)    (13.11%)     (13.88%)    (13.46%)     12.67%

</TABLE>

TABLE 12

<TABLE>
<CAPTION>

Selected Equity Ratios
                                                       1998        1997      Regulatory
                                                       Ratio       Ratio     Requirement
<S>                                                    <C>         <C>       <C>
Equity as a percent of assets                          10.22%      12.40%        N/A
Core capital as a percent of risk based assets          8.36%      17.43%        4.00%
Total capital as a percent of risk based assets         9.31%      18.67%        8.00%
Leverage ratio                                          6.00%      11.79%        3.00%
</TABLE>


TABLE 13

<TABLE>
<CAPTION>

Selected Financial Ratios
                                                                   1998         1997        1996        1995         1994
<S>                                                               <C>          <C>         <C>         <C>          <C>
Return on average assets                                           8.70%        1.07%       1.16%       1.05%        0.70%
Return on average equity                                           8.33%        8.61%       7.85%       7.06%        4.63%
Average equity to average assets                                  10.22%       12.40%      14.54%      13.62%       14.10%
Dividend payout ratio                                             53.41%       50.00%      50.67%      46.88%       65.57%
Interest rate spread                                               3.59%        3.72%       3.39%       3.39%        3.38%
Net interest margin                                                4.24%        4.52%       4.33%       4.27%        4.19%
Net non-interest expense to assets                                 2.29%        2.38%       2.15%       2.86%        3.15%
Efficiency ratio                                                  68.82%       64.76%      60.76%      64.13%       73.67%
Allowance for loan losses to total loans at end of period          1.08%        1.11%       1.19%       0.98%        0.91%

</TABLE>


















                                       21

<PAGE>   22
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not Applicable

                                    PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

a)  Directors of the registrant. The information that will appear under
    "Election of Directors" in the definitive Proxy Statement to be prepared and
    filed for the Company's Annual Meeting of Stockholders on May 19, 1999 is
    incorporated herein by this reference.

b)  Executive officers of the Registrant. The information presented in Item I of
    this report is incorporated herein by this reference.

ITEM 10 EXECUTIVE COMPENSATION

The information that will appear under "Director and Executive Compensation" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information that will appear under "Beneficial Ownership of Securities" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information that will appear under "Certain Transactions with Management and
Others" in the definitive Proxy Statement to be prepared and filed for the
Company's Annual Meeting of Stockholders on May 19, 1999 in incorporated herein
by this reference.


ITEM 13 EXHIBITS AND REPORTS FORM 8-K

a)  Documents Filed:

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

3     Exhibits. See "Exhibit Index" which is incorporated herein by this
reference.

b) Reports On Form 8-K:
      There were no reports filed on Form 8-K during the fourth quarter of 1998.







                                       22
<PAGE>   23


         SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1999.

                                       Blackhawk Bancorp, Inc.




                                       By /s/ James P. Kelley
                                          --------------------------

                                       James P. Kelley

                                       Executive Vice President and
                                           Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 31, 1999.



Principal Executive Officer and Director:
  Director, President and                      /s/ Dennis M Conerton
Chief Executive Officer                        ---------------------------------
                                               Dennis M. Conerton, President and
Chief Executive Officer


Principal Financial Officer, Accounting
  Officer and Director:                        /s/ Jesse L Calkins
                                               ---------------------------------
                                               Jesse L. Calkins,
                                               Senior Vice President
                                               Treasurer and Chief Financial
                                               Officer


Directors:


/s/ John B. Clark                               /s/ James P. Kelley
-------------------------------                 --------------------------------
    John B. Clark                                   James P. Kelley

/s/ H. Daniel Green                             /s/ Fred Klett
-------------------------------                 --------------------------------
    Dr. H. Daniel Green                             Fred Klett

/s/ Charles Hart                                /s/ George Merchant
-------------------------------                 --------------------------------
    Charles Hart                                    George Merchant

/s/ Kenneth A Hendricks                         /s/ Roger Taylor
-------------------------------                 --------------------------------
    Kenneth A. Hendricks                            Roger Taylor








                                       23

<PAGE>   24






                             BLACKHAWK BANCORP, INC.

         Index To Financial Statements And Financial Statement Schedules

The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:

<TABLE>
<CAPTION>
                                                                          Annual
                                                                    Report Pages
                                                                    ------------
<S>                                                                 <C>
Report of Independent Public Accountants............................30

Consolidated Balance Sheets - December 31, 1998
  and 1997 .........................................................31

Consolidated Statements of Income for the years ended
  December 31, 1998, 1997 and 1996 .................................32

Consolidated Statements of Stockholders' Equity for
  the years ended December 31, 1998, 1997 and 1996..................33

Consolidated Statements of Cash Flows for the years
  ended December 31, 1998, 1997 and 1996 ...........................34

Notes to the Consolidated Financial Statements......................35-49
</TABLE>













                                       24
<PAGE>   25

                             Blackhawk Bancorp, Inc.
                                Exhibit Index To
                        1998 Annual Report on Form 10-KSB

<TABLE>
<CAPTION>
                                                                                               Filed
Exhibit                                            Incorporated Herein                         Here-            Page
Number          Description                        By Reference To:                            with             No.
------          -----------                        ----------------                            ----             ---

<S>             <C>                                <C>
3.1             Amended and Restated               Exhibit 3.1 to
                Articles of Incorporation          Amendment No. 1 to Registration
                of Blackhawk Bancorp, Inc.         Statement on Form S-1(Reg. No.
                                                   33.32351)

3.2             By-Laws of Blackhawk               Exhibit 3.2 to Amendment No. 1
                Bancorp, Inc., as                  to Registration Statement on Form
                amended.                           S-1


3.3             Amendments to By-Laws              Exhibit 3.3 to 1994 Form 10-KSB  dated
                of Blackhawk Bancorp,              March 29, 1995
                Inc., as amended.

3.4             Amendments to By-Laws  of          Exhibit 3.4 to 1994 Form 10-KSB  dated
                Blackhawk Bancorp, Inc., as        March 29, 1995.
                amended.

4.1             Sections 15 and 19 of Plan         Exhibit 1.2  to Amendment No. 1
                of Conversion of Beloit            to Registration Statement on
                Savings Bank, as amended           Form-1 (No. 33-32351) filed on March
                                                   5, 1990.

10.12           Blackhawk State Bank               Exhibit 10.12 to 1996 Form 10-KSB,
                Officer Bonus Plan, as             dated March 28, 1997
                amended

10.2            Written description of Plan        Proxy Statement for its Annual
                for Life Insurance of              Meeting of Stockholders, on  May 8,
                Blackhawk State Bank               1991, dated April 4, 1991


10.3            Blackhawk Bancorp, Inc.            Exhibit 10.3  to 1990 Form 10-K,
                Employee Stock Ownership           dated March 31, 1990
                Plan

10.31           Amendment to Blackhawk             Exhibit 10.31 to 1994 Form 10-KSB,
                Bancorp, Inc. Employee             dated March 29, 1995
                Stock   Ownership Plan

10.4            Blackhawk Bancorp, Inc.            Exhibit 10.4 to Amendment No. 1
                Employee Stock                     to Registration Statement Form
                Ownership Trust                    S-1 (No. 33-32351)
</TABLE>






                                       25
<PAGE>   26


<TABLE>
<CAPTION>

                                                   Incorporated Herein                         Filed
Exhibit                                            By Reference To:                            Here-            Page
Number          Description                        -------------------                         with             No.
------          -----------                                                                    ----             ---
<C>             <C>                                <C>                                         <C>              <C>
10.5            Blackhawk Bancorp, Inc.            Exhibit 10.5 to Amendment No. 1
                Directors' Stock  Option Plan      to Registration Statement Form
                                                   S-1 (No. 33-32351)


10.6            Blackhawk Bancorp, Inc.            Exhibit 10.6 to Registration
                Executive Stock Option Plan        Statement Form S-1 (No. 33-32351)


10.7            Form of Severance  Payment         Exhibit 10.8 to Amendment No. 1
                Agreement entered into             to Registration Statement Form
                between Blackhawk State            S-1 (No. 33-32351)
                Bank and Messrs. Calkins,
                Kelley and Rusch

10.71           Form of Severance Payment          Exhibit  10.8  to  1994  Form  10-KSB,
                Agreement entered into             dated March 29, 1995
                between Blackhawk State
                Bank and Mr. Conerton

10.8            Blackhawk Bancorp, Inc.            Exhibit 10.9 to 1994 Form 10-KSB,
                Directors' Stock Option Plan       dated March 29, 1995

                Blackhawk Bancorp, Inc.            Proxy Statement for its Annual
10.9            Executive Stock Option Plan        Meeting of Stockholders on May 13,
                                                   1998, dated April 2, 1998

13              1998 Annual Report To              Proxy Statement for its Annual
                Stockholders                       Meeting of Stockholders on May 19,
                                                   1999, dated April 3, 1999

22              Subsidiaries of
                Registrant

23              Proxy Statement for its
                Annual Meeting of
                Stockholders on May 19, 1999
                                                                                                    X           27

</TABLE>



                                       26









<PAGE>   27


                             BLACKHAWK BANCORP, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1998


<PAGE>   28



                   Index To Consolidated Financial Statements



                                                                           Page
                                                                           ----

INDEPENDENT AUDITOR'S REPORT                                                 3

FINANCIAL STATEMENTS

     Consolidated Balance Sheets                                             4

     Consolidated Statements of Income                                       5

     Consolidated Statements of Shareholders' Equity                         6

     Consolidated Statements of Cash Flows                                   7

     Notes to Consolidated Financial Statements                             8-22

















                                       2

<PAGE>   29



                          INDEPENDENT AUDITOR'S REPORT




Board of Directors and Shareholders
Blackhawk Bancorp, Inc.
Beloit, WI 53511


We have audited the accompanying consolidated balance sheet of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. 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 audit. The consolidated financial statements
of Blackhawk Bancorp, Inc. and Subsidiary as of and for each of the two years in
the period ended December 31, 1997, were audited by other auditors whose report
dated February 20, 1998, expressed an unqualified opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blackhawk
Bancorp, Inc. and Subsidiary at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.




/s/ Wipfli Ullrich Bertelson LLP

Wipfli Ullrich Bertelson LLP
January 21, 1999
Green Bay, Wisconsin










                                       3

<PAGE>   30


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>

                                                                                          1998             1997
                                                                                          ----             ----
<S>                                                                                 <C>               <C>
ASSETS
Cash and cash equivalents                                                           $    15,973,000   $   8,680,000
Federal Funds sold and other short-term investments                                      15,335,000       8,889,000
Securities:
    Available-for-sale                                                                   38,475,000       9,488,000
    Held-to-maturity                                                                     21,896,000      28,920,000
Loans held for sale                                                                       4,362,000       1,024,000
Loans, net of allowance for loan losses of  $1,915,000 in 1998 and $1,523,000 in        176,027,000     135,750,000
1997
Bank premises and equipment, net                                                          7,483,000       4,353,000
Accrued interest receivable                                                               1,908,000       1,467,000
Other intangible assets                                                                   8,152,000       1,850,000
Other assets                                                                              1,857,000       1,555,000
                                                                                    ---------------   -------------
    Total Assets                                                                    $   291,468,000   $ 201,976,000
                                                                                    ===============   =============
LIABILITIES AND SHAREHOLDERS' EQUITY
    Deposits:
        Non-interest bearing                                                        $    33,110,000   $  19,572,000
        Interest Bearing                                                                208,285,000     139,479,000
                                                                                    ---------------   -------------
             Total Deposits                                                             241,395,000     159,051,000
                                                                                    ---------------   -------------
    Borrowed funds:
        Short-term borrowings                                                             4,576,000      12,231,000
        Long-term borrowings                                                             17,123,000       4,850,000
                                                                                    ---------------   -------------
             Total Borrowed Funds                                                        21,699,000      17,081,000
                                                                                    ---------------   -------------
    Accrued interest payable                                                              1,046,000         892,000
    Other liabilities                                                                     2,928,000       1,817,000
                                                                                    ---------------   -------------
             Total Liabilities                                                          267,068,000     178,841,000
                                                                                    ---------------   -------------
SHAREHOLDERS' EQUITY
    Preferred stock, $.01 par value per share; authorized
        1,000,000 shares; issued, none                                                            -               -
    Common stock, $.01 par value per share; authorized
        10,000,000 shares; issued 2,313,373 in 1998 and 2,296,414 in 1997                    23,000          23,000
    Additional paid in capital                                                            7,099,000       7,002,000
    Employee stock options earned                                                           130,000         131,000
    Retained earnings                                                                    16,975,000      16,045,000
    Less 10,324 and 9,278 shares of treasury stock, at cost,
        at December 31, 1998 and 1997, respectively                                        (120,000)       (104,000)
    Accumulated other comprehensive income                                                  293,000          38,000
                                                                                    ---------------   -------------
        Total Shareholders' Equity                                                       24,400,000      23,135,000
                                                                                    ---------------   -------------
        Total Liabilities and Shareholders' Equity                                  $   291,468,000   $ 201,976,000
                                                                                    ===============   =============
</TABLE>

See Notes to Consolidated Financial Statements













                                       4

<PAGE>   31


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>

                                                                          1998            1997             1996
                                                                          ----            ----             ----
<S>                                                                  <C>             <C>              <C>

Interest Income:
   Interest and fees on loans                                        $  13,975,000   $   11,597,000   $    8,777,000
   Interest on securities:
      Taxable                                                            2,482,000        2,433,000        2,123,000
      Exempt from federal income taxes                                     265,000          152,000          221,000
   Interest on federal funds sold and other short-term investments         604,000          126,000          202,000
                                                                     -------------   --------------   --------------
      Total interest income                                             17,326,000       14,308,000       11,323,000
                                                                     -------------   --------------   --------------

Interest Expense:
   Interest on deposits                                                  7,569,000        5,931,000        4,578,000
   Interest on short-term borrowings                                       364,000          612,000          643,000
   Interest on long-term borrowings                                        621,000          177,000          173,000
                                                                     -------------   --------------   --------------
      Total interest expense                                             8,554,000        6,720,000        5,394,000
                                                                     -------------   --------------   --------------
      Net interest income                                                8,772,000        7,588,000        5,929,000

Provision for loan losses                                                  315,000          192,000          145,000
      Net interest income after provision for loan losses                8,457,000        7,396,000        5,784,000
Other Operating Income:
   Trust department income                                                 201,000          168,000          122,000
   Service charges and fees                                              1,096,000          897,000          569,000
   Loan servicing fees                                                     286,000           95,000                -
   Gain on sale of loans                                                   443,000           65,000           75,000
   Other income                                                            473,000          311,000          240,000
                                                                     -------------   --------------   --------------
      Total other operating income                                       2,499,000        1,536,000        1,006,000
                                                                     -------------   --------------   --------------

Other Operating Expenses:
   Salaries and wages                                                    3,352,000        2,436,000        1,768,000
   Employee benefits                                                       648,000          631,000          437,000
   Occupancy expense, net                                                  588,000          426,000          309,000
   Furniture and equipment                                                 522,000          329,000          350,000
   Data processing                                                         542,000          445,000          320,000
   Professional fees                                                       169,000          342,000          199,000
   Advertising and marketing                                               171,000          139,000          113,000
   Amortization of intangible assets                                       358,000          137,000                -
   Other operating expenses                                              1,407,000        1,024,000          718,000
                                                                     -------------   --------------   --------------
      Total other operating expenses                                     7,757,000        5,909,000        4,214,000
                                                                     -------------   --------------   --------------
      Income before income taxes                                         3,199,000        3,023,000        2,576,000
   Provision for income taxes                                            1,189,000        1,067,000          848,000
                                                                     -------------   --------------   --------------
        Net Income                                                   $   2,010,000   $    1,956,000   $    1,728,000
                                                                     =============   ==============   ==============

        Basic Earnings Per Share                                     $         .88   $         .86    $          .76
                                                                     =============   =============    ==============
        Diluted Earnings Per Share                                   $         .83   $         .82    $          .73
                                                                     =============   =============    ==============
        Dividends Per Share                                          $         .47   $         .43    $          .38
                                                                     =============   =============    ==============
</TABLE>

See Notes to Consolidated Financial Statements


















                                       5

<PAGE>   32


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>


                                                                    Additional
                                                         Common       Paid In       Stock       Retained     Treasury
                                                          Stock       Capital      Options      Earnings      Stock

<S>                                                    <C>          <C>           <C>         <C>           <C>
Balance, December 31, 1995                             $  23,000    $ 6,946,000   $  52,000   $14,210,000   $       -
Net Income                                                                                      1,728,000
Other comprehensive (loss)

Total comprehensive income

Principal payments on ESOP loan
Cash dividends declared on common stock, $.38 per                                                (866,000)
share
Purchase of stock for treasury, 7,578 shares at                                                               (84,000)
$11.13 per share
Compensatory employee stock options:
    Recognized                                                                       43,000
    Exercised or expired                                                 14,000
                                                       ---------    -----------   ---------   -----------   ---------

Balance December 31, 1996                                 23,000      6,960,000      95,000    15,072,000    (84,0000
Net Income                                                                                      1,956,000
Other comprehensive income

Total comprehensive income

Principal payments on ESOP loan
Cash dividends declared on common stock, $.43 per                                                (983,000)
share
Purchase of stock for treasury, 1,700 shares at                                                               (20,000)
$11.69 per share
Compensatory employee stock options:
    Recognized                                                                       36,000
    Exercised or expired                                                 42,000
                                                       ---------    -----------   ---------   -----------   ---------

Balance December 31, 1997                                 23,000      7,002,000     131,000    16,045,000    (104,000)
Net Income                                                                                      2,010,000
Other comprehensive income

Total comprehensive income

Cash dividends declared on common stock, $.47 per                                              (1,080,000)
share
Purchase of stock for treasury, 1,046 shares at                                                               (16,000)
$15.00 per share
Compensatory employee stock options:
    Exercised or expired                                                 97,000      (1,000)
                                                       ---------    -----------   ---------   -----------   ---------

Balance, December 31, 1998                             $  23,000    $ 7,099,000   $ 130,000   $16,975,000   $(120,000)
                                                       =========    ===========   =========   ===========   =========

</TABLE>




<TABLE>
<CAPTION>

                                                         Accumulated
                                                            Other
                                                        Comprehensive
                                                           Income
                                                       Income (Deficit)    Other       Total
<S>                                                    <C>              <C>         <C>
Balance, December 31, 1995                             $        37,000  $ (79,000)  $21,189,000
Net Income                                                                            1,728,000
Other comprehensive (loss)                                     (48,000)                 (48,000)
                                                                                    -----------
Total comprehensive income                                                            1,680,000
                                                                                    -----------
Principal payments on ESOP loan                                            53,000        53,000
Cash dividends declared on common stock, $.38 per                                      (866,000)
share
Purchase of stock for treasury, 7,578 shares at                                         (84,000)
$11.13 per share
Compensatory employee stock options:
    Recognized                                                                           43,000
    Exercised or expired                                                                 14,000
                                                       ---------------  ---------   -----------

Balance December 31, 1996                                      (11,000)   (26,000)   22,029,000
Net Income                                                                            1,956,000
Other comprehensive income                                      49,000                   49,000
                                                                                    -----------
Total comprehensive income                                                            2,005,000
                                                                                    -----------
Principal payments on ESOP loan                                            26,000        26,000
Cash dividends declared on common stock, $.43 per                                      (983,000)
share
Purchase of stock for treasury, 1,700 shares at                                         (20,000)
$11.69 per share
Compensatory employee stock options:
    Recognized                                                                           36,000
    Exercised or expired                                                                 42,000
                                                       ---------------  ---------   -----------

Balance December 31, 1997                                       38,000          -    23,135,000
Net Income                                                                            2,010,000
Other comprehensive income                                     255,000                  255,000
                                                                                    -----------
Total comprehensive income                                                            2,265,000
                                                                                    -----------
Cash dividends declared on common stock, $.47 per                                    (1,080,000)
share
Purchase of stock for treasury, 1,046 shares at                                         (16,000)
$15.00 per share
Compensatory employee stock options:
    Exercised or expired                                                                 96,000
                                                       ---------------  ---------   -----------

Balance, December 31, 1998                             $       293,000  $       -   $24,400,000
                                                       ===============  =========   ===========
</TABLE>

See Notes to Consolidated Financial Statements









                                       6

<PAGE>   33


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>

CASH FLOWS FROM OPERATING ACTIVITIES                                 1998             1997              1996
                                                                     ----             ----              ----
<S>                                                             <C>              <C>              <C>
    Net Income                                                  $   2,010,000    $   1,956,000    $   1,728,000
    Adjustments to reconcile net income to net cash provided
    by (used in)
       operating activities:
          Compensatory employee stock options recognized               (1,000)          36,000           43,000
          Provision for loan losses                                   315,000          192,000          145,000
          Provision for depreciation and amortization                 791,000          476,000          333,000
          Amortization of premiums and (accretion of
          discounts) on
              investment securities, net                              (92,000)        (112,000)         (80,000)
          Gain on sale of property and equipment                            -                -           (3,000)
          Gain on sale of loans                                      (443,000)         (65,000)         (75,000)
          Loans originated for sale                               (34,938,000)     (11,372,000)      (5,329,000)
          Proceeds from sale of loans                              30,127,000       10,654,000        5,164,000
          Change in assets and liabilities:
          Decrease in accrued interest receivable                      62,000            2,000          176,000
          (Increase) decrease in other assets                        (845,000)         565,000         (183,000)
          Increase in accrued interest and other liabilities          209,000           34,000          179,000
                                                                -------------    -------------    -------------
          Net cash provided by (used in) operating activities      (2,805,000)       2,366,000        2,098,000
                                                                -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sale of property and equipment                            -                -           12,000
    Proceeds from maturity of securities available-for-sale        22,798,000        7,824,000       22,484,000
    Proceeds from maturity of securities held-to-maturity          13,248,000       20,723,000       11,815,000
    Purchase of securities available-for-sale                     (28,892,000)      (6,242,000)     (21,628,000)
    Purchase of securities held-to-maturity                        (4,831,000)     (21,139,000)     )10,873,000)
    Net cash used in acquisitions                                  (7,140,000)        (444,000)               -
    (Increase) decrease in federal funds sold and other
       Short-term investments, net                                  1,579,000       (4,212,000)       7,057,000
    Loans originated, net of principal collected                    5,499,000       (1,077,000)      (4,598,000)
    Purchase of bank premises and equipment                          (848,000)        (298,000)         (73,000)
                                                                -------------    -------------    -------------
       Net cash provided by (used in) investing activities          1,413,000       (4,865,000)       4,196,000
                                                                -------------    --------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase (decrease) in deposits                             7,066,000       (3,253,000)      (1,406,000)
    Net increase (decrease) in short-term borrowings               (7,655,000)       4,826,000       (2,275,000)
    Proceeds from long-term borrowings                             10,400,000        3,500,000                -
    Payments on long-term borrowings                                (127,0000         (900,000)      (1,300,000)
    Dividends paid                                                 (1,080,000)        (983,000)        (866,000)
    Proceeds from issuance of common stock                             97,000           42,000           14,000
    Purchase of common stock for treasury                             (16,000)         (20,000)         (84,000)
                                                                -------------    -------------    -------------
       Net cash provided by (used in) financing activities          8,685,000        3,212,000       (5,917,000)
                                                                -------------    -------------    -------------
       Increase in cash and cash equivalents                        7,293,000          713,000          377,000
Cash and cash equivalents:
    Beginning                                                       8,680,000        7,967,000        7,590,000
                                                                -------------    -------------    -------------
    Ending                                                      $  15,973,000    $   8,680,000    $   7,967,000
                                                                =============    =============    =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash payments for:
       Interest                                                 $   8,849,000    $   7,264,000    $   5,407,000
       Income taxes                                                 1,016,000          341,000          878,000

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES
    Other assets acquired in settlement of loans                      637,000          292,000          226,000
    Principal payments on ESOP loan                                         -           26,000           53,000
    Purchase of net assets
       Fair value of non cash assets                               83,258,000       45,595,000
       Liabilities assumed                                         78,335,000       45,451,000
</TABLE>

See Notes to Consolidated Financial Statements







                                       7

<PAGE>   34


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

             The accompanying consolidated financial statements conform to
             generally accepted accounting principles and to general practices
             within the banking industry. The following is a description of the
             more significant accounting policies:

         NATURE OF BANKING ACTIVITIES:

             The Company provides a variety of banking services to individuals
             and businesses through its eleven facilities in Beloit, Wisconsin
             and Belvidere, Rockford, Roscoe, Oregon and Rochelle, Illinois. Its
             primary deposit products are demand deposits, savings, and
             certificates of deposit and its primary lending products are
             commercial, real estate mortgage and installment loans.

             As of December 31, 1998 and 1997, 74% and 71% , respectively, of
             the gross loan portfolio consisted of real estate loans on real
             estate located in Southcentral Wisconsin and Northcentral Illinois.
             Generally, these loans are expected to be repaid from the cash
             flows of the borrowers and are collateralized by the related
             property. Credit losses arising from real estate lending
             transactions compare favorably with Blackhawk's credit loss
             experience on its loan portfolio as a whole. However, adverse
             changes in the local economy would have a direct impact on the
             credit risk in the loan portfolio.

         PRINCIPLES OF CONSOLIDATION:

             The accompanying consolidated financial statements include the
             accounts of Blackhawk Bancorp, Inc. and its wholly owned
             subsidiary, Blackhawk State Bank (Blackhawk) and Blackhawk's wholly
             owned subsidiaries Nevahawk Investment, Inc., RSL, Inc., Midland
             Acceptance Corporation, and First Financial Services, Inc. All
             significant intercompany transactions and accounts have been
             eliminated in consolidation.

             On September 1, 1998, the Company acquired for cash all of the
             outstanding shares of First Financial Bancorp, Inc. and its
             wholly-owned subsidiaries. The total acquisition cost was
             $12,690,000. The excess of the total acquisition cost over the fair
             value of the net assets acquired of $2,951,000 is being amortized
             over 20 years by the straight-line method. The acquisition has been
             accounted for as a purchase and the results of operations of First
             Financial since the date of acquisition are included in the
             Consolidated Financial Statements. The assets of First Financial
             were subsequently merged into the Company.

             The unaudited proforma effect of the transaction had it occurred
             prior to 1997 is as follows: (dollars in thousands, except per
             share information)
<TABLE>
<CAPTION>

                                                                     1998          1997
                                                                     ----          ----
<S>                                                              <C>           <C>
                    Net interest income:
                        Blackhawk Bancorp, Inc.                  $    8,772    $    7,588
                        First Financial Bancorp, Inc.                 1,253         1,997
                                                                 ----------    ----------
                        Total                                    $   10,025    $    9,585
                                                                 ==========    ==========
                    Net income:
                        Blackhawk Bancorp, Inc.                  $    2,010    $    1,956
                        First Financial Bancorp, Inc.                 (530)         (613)
                                                                 ----------    ----------
                        Total                                    $    1,480    $    1,343
                                                                 ==========    ==========
                    Basic Earnings per share:
                        Blackhawk Bancorp, Inc.                  $      .88    $      .86
                        First Financial Bancorp, Inc.                 (.24)         (.27)
                                                                 ----------    ----------
                        Total                                    $      .64    $      .59
                                                                 ==========    ==========
                    Diluted earnings per share:
                        Blackhawk Bancorp, Inc.                  $      .83    $      .82
                        First Financial Bancorp, Inc.                 (.22)         (.26)
                                                                 ----------    ----------
                        Total                                    $      .61    $      .56
                                                                 ==========    ==========

</TABLE>


             On April 30, 1997, the Company acquired for cash all of the
             outstanding shares of Rochelle Bancorp, Inc. and its wholly-owned
             subsidiaries. The total acquisition cost was $4,319,000. The excess
             of the total acquisition cost over the fair value of the net assets
             acquired of $1,934,000 is being amortized over 10 to 20 years by
             the straight-line method. The acquisition has been accounted for as
             a purchase and the results of operations of Rochelle since the date
             of acquisition are included in the consolidated financial
             statements. The assets of Rochelle Bancorp, Inc. were subsequently
             merged into the Company.

         USE OF ESTIMATES:

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








                                       8

<PAGE>   35

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         STATEMENTS OF CASH FLOWS:

             For the purpose of reporting cash flows, cash and cash equivalents
             includes cash on hand and amounts due from banks (including cash
             items in process of clearing). Cash flows from federal funds sold
             and other short-term investments, with an original maturity of less
             than three months, loans, deposits, and short-term borrowings with
             an original maturity of less than three months, are reported net
             under general practices within the banking industry.

         SECURITIES AVAILABLE-FOR-SALE:

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

         SECURITIES HELD-TO-MATURITY:

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

         LOANS:

             Loans are stated at unpaid principal balances, less the allowance
             for loan losses and net of deferred loan fees.

             Loan origination fees exceeding related costs are deferred and
             amortized over the contractual life of the loan as a yield
             adjustment.

             Mortgage loans held for sale are recorded at the lower of cost or
             fair market value. Gains and losses on the sale of mortgage loans
             are included in other non-interest income.

             The accrual of interest on impaired loans is discontinued when, in
             management's opinion, the borrower may be unable to meet payments
             as they become due. When interest accrual is discontinued, all
             unpaid accrued interest is reversed. Interest income is
             subsequently recognized only to the extent it is received in cash.

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

         SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING:

             The Company sells first mortgage loans with yield rates to the
             buyer based upon the current market rates which may differ from the
             contractual rate on the loans sold. At the time that loans are
             sold, a gain or loss is recorded which reflects the difference
             between the assumed cash flow to be generated by the contractual
             interest rates of the loans sold and the assumed cash flow
             resulting from the yield to be paid to the purchaser, adjusted for
             servicing and discounted to reflect present value. Loan servicing
             fees are recognized over the lives of the related loans. Real
             estate loans serviced for others are not included in the
             accompanying balance sheets.

         MORTGAGE SERVICING RIGHTS:

             The Company capitalizes the estimated value of mortgage servicing
             rights through the origination and sale of mortgage loans. When the
             originated mortgage loans are sold or securitized into the
             secondary market, the Company allocates the total cost of the
             mortgage loans between mortgage servicing rights and the loans,
             based on their relative fair values. The cost of mortgage servicing
             rights is amortized in proportion to, and over the period of,
             estimated net servicing revenues. Mortgage servicing rights.








                                       9

<PAGE>   36

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         MORTGAGE SERVICING RIGHTS (CONTINUED)

             are periodically evaluated for impairment. For purposes of
             measuring impairment, the servicing rights are stratified into
             pools based on one or more predominant risk characteristics of the
             underlying loans including loan type, interest rate and term.
             Impairment represents the excess of carrying value of a stratified
             pool over its fair value, and is recognized through a valuation
             allowance. The fair value of each servicing rights pool is
             evaluated based on the present value of estimated future cash flows
             using a discount rate commensurate with the risk associated with
             that pool, given current market conditions. Estimates of fair value
             include assumptions about prepayment speeds, interest rates, and
             other factors, which are subject to change over time. Changes in
             these underlying assumptions could cause the fair value of mortgage
             servicing rights, and the related valuation allowance, to change
             significantly in the future.

         BANK PREMISES AND EQUIPMENT:

             Bank premises and equipment are stated at cost less accumulated
             depreciation. Depreciation is computed principally on a
             straight-line basis over the estimated useful life of each asset.
             Expenditures for maintenance and repairs are reflected as expense
             when incurred. Gains or losses and disposition of premises and
             equipment are reflected in income.


         OTHER REAL ESTATE:

             Other real estate is carried in other assets at the lower of cost
             or fair value less estimated disposal costs. When the property is
             acquired through foreclosure, any excess of the related loan
             balance over market value is charged to the allowance for loan
             losses. It is Blackhawk's policy to account for collateral that has
             been substantively repossessed in the same manner as collateral
             that has been formally repossessed. Subsequent write-downs or
             losses upon sale are charged to other operating expense.

         SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

             The Bank enters into sales of securities under agreements to
             repurchase (reverse-repurchase agreements). Reverse-repurchase
             agreements are treated as financings, and the obligations to
             repurchase securities sold are reflected as a liability in the
             balance sheets. The securities underlying the agreements remain in
             the asset accounts.

         PENSION PLAN:

             Blackhawk has a defined-contribution plan which covers
             substantially all full-time employees. Costs of the plan are based
             on participants' eligibility and compensation and pension expense
             is recorded as benefits are earned.

         TRUST ASSETS:

             Assets held in a fiduciary or agency capacity are not included in
             the consolidated financial statements as they are not assets of
             Blackhawk.

         INCOME TAXES:

             The Company, Blackhawk and Blackhawk's subsidiaries file a
             consolidated federal income tax return and separate state income
             tax returns.

             Deferred taxes are provided on a liability method whereby deferred
             tax assets are recognized for deductible temporary differences and
             operating loss and tax credit carryforwards and deferred tax
             liabilities are recognized for taxable temporary differences.
             Temporary differences are the differences between the reported
             amounts of assets and liabilities and their tax basis. Deferred tax
             assets are reduced by a valuation allowance when, in the opinion of
             management, it is more likely than not that some portion or all of
             the deferred tax assets will not be realized. Deferred tax assets
             and liabilities are adjusted for the effects of changes in tax laws
             and rates on the date of enactment.

         EARNINGS PER SHARE DATA:

             The per share data is based on the weighted average number of
             common stock and common stock equivalents outstanding during each
             year.

         COMPREHENSIVE INCOME:

             Comprehensive income consists of net income and other comprehensive
             income. Other comprehensive income includes unrealized gains and
             losses on securities available for sale which are recognized as a
             separate component of equity, accumulated other comprehensive
             income (deficit).



                                       10


<PAGE>   37

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         FUTURE ACCOUNTING CHANGE

             In June 1998, the Financial Accounting Standards Board (FASB)
             issued Statement of Financial Accounting Standards (SFAS) No. 133,
             "Accounting for Derivative Instruments and Hedging Activities."
             This statement establishes accounting and reporting standards for
             derivative instruments and for hedging activities. This statement
             requires an entity to recognize all derivatives as either assets or
             liabilities in the balance sheet and measure those instruments at
             fair value. The accounting for changes in the fair value of a
             derivative depends on the intended use of the derivative and the
             resulting designation. This statement is effective for fiscal years
             beginning after June 15, 1999. Management, at this time, cannot
             determine the effect adoption of this statement may have on the
             consolidated financial statements of the Company as the accounting
             for derivatives is dependent on the amount and nature of
             derivatives in place at the time of adoption.

NOTE 2.  CHANGES IN ACCOUNTING PRINCIPLES

             Effective January 1,1998, the Company adopted SFAS No. 130,
             "Reporting Comprehensive Income," which was issued in June 1997. In
             accordance with this statement, the Company reports those items
             defined as comprehensive income in the statement of changes in
             shareholders' equity. The adoption of SFAS No. 130 did not have an
             impact on the Company's financial position or results of
             operations.

             Effective January 1, 1998, the Company adopted SFAS No. 131,
             "Disclosures About Segments of an Enterprise and Related
             Information," which was issued in June 1997. This statement
             establishes new standards for reporting information about operating
             segments in annual and interim financial statements. The standard
             also requires descriptive information about the way operating
             segments are determined, the products and services provided by the
             segments, and the nature of differences between reportable segment
             measurements and those used for the consolidated enterprise. The
             disclosure requirements had no impact on the Company's financial
             position or results of operations.

NOTE 3.  SECURITIES

             Debt securities have been classified in the balance sheets
             according to management's intent as either available for sale or
             held-to-maturity. The carrying amount of securities and their
             approximate fair values at December 31, is as follows:

         AVAILABLE-FOR-SALE SECURITIES:
<TABLE>
<CAPTION>

                                                                                1998
                                                                                ----
                                                                  Gross Unrealized Gross Unrealized
                                                   Amortized Cost       Gains          (Losses)        Fair Value
                                                   --------------       -----          --------        ----------
<S>                                                <C>              <C>             <C>              <C>
              U.S. Treasury Securities             $     500,000    $       4,000   $           -    $     504,000
              U.S. Government Agencies                27,294,000          264,000        (47,000)       27,511,000
              Obligations of states and
                  political subdivisions                 161,000            2,000               -          163,000
              Other Securities                        10,212,000           90,000         (5,000)       10,297,000
                                                   -------------    -------------   ------------     -------------
                                                   $  38,167,000    $     360,000   $    (52,000)    $  38,475,000
                                                   =============    =============   ============     =============

<CAPTION>

                                                                                1997
                                                                                ----
                                                                  Gross Unrealized Gross Unrealized
                                                   Amortized Cost       Gains          (Losses)        Fair Value
                                                   --------------       -----          --------        ----------
              U.S. Treasury Securities             $   1,251,000    $       2,000   $           -    $   1,253,000
              U.S. Government Agencies                 7,333,000           75,000        (20,000)        7,388,000
              Other Securities                           847,000                                           847,000
                                                   -------------    -------------   ------------     -------------
                                                   $   9,431,000    $      77,000   $    (20,000)    $   9,488,000
                                                   =============    =============   ============     =============
<CAPTION>

         HELD-TO-MATURITY SECURITIES:
                                                                                1998
                                                                                ----
                                                                  Gross Unrealized Gross Unrealized
                                                   Amortized Cost       Gains          (Losses)        Fair Value
                                                   --------------       -----          --------        ----------
              U.S. Treasury Securities             $    4,997000   $      61,000     $           -   $   5,058,000
              U.S. Government Agencies                 8,874,000          33,000          (12,000)       8,895,000
              Obligations of states and
                  political subdivisions               8,025,000         112,000           (2,000)       8,135,000
                                                   -------------   -------------     ------------    -------------
                                                   $  21,896,000   $     206,000     $    (14,000)   $  22,088,000
                                                   =============   =============     ============    =============
<CAPTION>

                                                                                1997
                                                                                ----
                                                                  Gross Unrealized Gross Unrealized
                                                   Amortized Cost       Gains          (Losses)        Fair Value
                                                   --------------       -----          --------        ----------
              U.S. Treasury Securities             $  10,191,000   $      97,000     $     (2,000)   $  10,286,000
              U.S. Government Agencies                13,900,000          81,000          (13,000)      13,968,000
              Obligations of states and
                  political subdivisions               4,340,000          23,000           (8,000)       4,355,000
              Other Securities                           489,000                                           489,000
                                                   -------------   -------------     ------------    -------------
                                                   $  28,920,000   $     201,000     $    (23,000)   $  29,098,000
                                                   =============   =============     ============    =============
</TABLE>





                                       11

<PAGE>   38
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 3.  SECURITIES (CONTINUED)

             The amortized cost and fair value of securities as of December 31,
             1998, by contractual maturity, are shown below. Maturities may
             differ from contractual maturities in mortgage-backed securities
             because the mortgages underlying the securities may be called or
             prepaid without any penalties. Therefore, these securities are not
             included in the maturity categories in the following maturity
             summary:

<TABLE>
<CAPTION>

                                                             Available-For-Sale                Held-to-Maturity
                                                             ------------------                ----------------
                                                      Amortized Cost     Fair Value     Amortized Cost    Fair Value
                                                      --------------     ----------     --------------    ----------
<S>                                                   <C>             <C>               <C>             <C>
                 Due in one year or less              $  10,558,000   $  10,649,000     $   3,727,000   $   3,755,000
                 Due after one year through five
                 years                                   13,756,000      13,766,000        10,921,000      11,021,000
                 Due after five years through ten
                 years                                    2,001,000       2,094,000         2,223,000       2,271,000
                 Mortgage-backed securities               9,838,000       9,872,000         5,025,000       5,041,000
                 Other Securities                         2,014,000       2,094,000                 -               -
                                                      -------------   -------------     -------------   -------------
                                                      $  38,167,000   $  38,475,000     $  21,896,000   $  22,088,000
                                                      =============   =============     =============   =============
</TABLE>


             There were no realized gains or losses on securities for 1998, 1997
             and 1996.

             Investment securities with an amortized cost of $19,941,000 and a
             fair value of $20,059,000, respectively, were pledged to secure
             public deposits, short-term borrowings, and other purposes required
             by law as of December 31, 1998.

NOTE 4.  LOANS

             The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>

                                                                                        1998              1997
                                                                                        ----              ----
<S>                                                                                <C>              <C>
               Real Estate - Mortgage                                              $ 130,924,000    $  96,995,000
               Real Estate - Construction                                              3,535,000        3,956,000
               Consumer                                                               26,532,000       25,086,000
               Commercial                                                             17,131,000       11,656,000
                                                                                   -------------    -------------
                                                                                   $ 178,122,000    $ 137,693,000

               Less:  Allowance for loan losses                                        1,915,000        1,523,000
                     Unearned Income                                                     180,000          420,000
                                                                                   -------------    -------------

                     Loans, Net                                                    $ 176,027,000    $ 135,750,000
                                                                                   =============    =============
</TABLE>


             Nonperforming loans includes loans which have been categorized by
             management as impaired and non-accruing because collection of
             interest is not assured, non-accruing loans (not considered
             impaired loans) and loans which are past-due ninety days or more as
             to interest and/or principal payments. The following summarizes
             information concerning nonperforming loans:
<TABLE>
<CAPTION>

                                                                                        1998              1997
                                                                                        ----              ----
<S>                                                                                <C>              <C>
               Impaired Loans                                                      $   1,479,000    $     325,000
               Non-accruing Loans                                                        857,000          664,000
               Past due 90 days or more and still accruing                               240,000           90,000
                                                                                   -------------    -------------
                     Total Non-Performing Loans                                    $   2,576,000    $   1,079,000
                                                                                   =============    =============
</TABLE>


             The average balance of loans classified as impaired totaled
             approximately $634,000 and $405,000 for the years ended December
             31, 1998 and 1997, respectively. The allowance for loan losses
             related to impaired loans amounted to approximately $100,000 and
             $115,000 at December 31, 1998 and 1997, respectively. Interest
             income on impaired loans of $47,000, $31,000 and $29,000 was
             recognized for cash payments received in 1998, 1997 and 1996,
             respectively.

             The Company has $0 and $133,000 in commitments to loan additional
             funds to the borrowers of nonperforming loans for the years ended
             December 31, 1998 and 1997, respectively.









                                       12

<PAGE>   39

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 4.  LOANS (CONTINUED)
                The effect on interest income of the non-accruing loans is as
follows:

<TABLE>
<CAPTION>

                                                                       1998             1997              1996
                                                                       ----             ----              ----
<S>                                                              <C>               <C>              <C>
               Income recognized                                 $      47,000     $      31,000    $      29,000
               Income that would have been recognized in
                   accordance with the original loan terms              76,000            77,000           52,000

               A summary of transactions in the allowance for
               loan losses is as follows:

               Balance at beginning of year                      $   1,523,000     $   1,186,000    $     929,000
               Acquired allowance for loan losses                      452,000           321,000                -
                                                                 -------------     -------------    -------------
               Adjusted balance at beginning of year                 1,975,000         1,507,000          929,000
               Provision charged to expense                            315,000           192,000          145,000
               Loans charged-off                                      (395,000)         (216,000)        (109,000)
               Recoveries                                               20,000            40,000          221,000
                                                                 -------------     -------------    -------------

                     Balance at End of Year                      $   1,915,000     $   1,523,000    $   1,186,000
                                                                 =============     =============    =============
</TABLE>

             Loans are made, in the normal course of business, to directors,
             executive officers, their immediate families and affiliated
             companies in which they are a principal shareholder (commonly
             referred to as related parties). The terms of these loans,
             including interest rates and collateral, are similar to those
             prevailing for comparable transactions and management believes they
             do not involve more than a normal risk of collectibility. Such
             direct and indirect loans are summarized as follows:

<TABLE>
<CAPTION>

                                                                                             1998             1997
                                                                                             ----             ----
<S>                                                                                    <C>               <C>
                  Balance at beginning of year                                         $  2,215,000      $  1,910,000
                  Loans acquired                                                                  -           167,000
                                                                                       ------------      ------------
                  Adjusted balance at beginning of year                                   2,215,000         2,077,000
                  New loans                                                               4,299,000         4,909,000
                  Principal repayments                                                   (3,317,000)       (4,771,000)
                                                                                       ------------      ------------
                       Balance at End of Year                                          $  3,197,000      $  2,215,000
                                                                                       ============      ============
</TABLE>

             In addition, the Company has loan commitments to the aforementioned
             related parties of $2,754,000 and $1,683,000 in 1998 and 1997,
             respectively.

NOTE 5.  MORTGAGE SERVICING RIGHTS:

             The unpaid principal balance of mortgage loans serviced for others,
             which are not included on the consolidated balance sheets, was
             $132,691,000 and $55,087,000 at December 31, 1998 and 1997,
             respectively. Management believes that the remaining book value of
             mortgage servicing rights approximates the fair value at December
             31, 1998 and 1997.

             The following is an analysis of the activity for mortgage servicing
             rights for the years ended December 31, 1998 and 1997 respectively:

<TABLE>
<CAPTION>

                                                                                              1998             1997
                                                                                              ----             ----
<S>                                                                                     <C>              <C>
                  Balance at beginning of year                                          $    545,000     $          -
                  Mortgage servicing rights acquired through business combinations           257,000          227,000
                  Fair value of servicing rights acquired in purchases                       208,000          241,000
                  Additions of originated mortgage servicing rights                          544,000          135,000
                  Amortization                                                              (526,000)         (58,000)
                                                                                        ------------     ------------
                  Balance at end of year                                                $  1,028,000     $    545,000
                                                                                        ============     ============
</TABLE>

NOTE 6.  BANK PREMISES AND EQUIPMENT

             A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>

                                                                                             1998             1997
                                                                                             ----             ----
<S>                                                                                     <C>              <C>
                  Land and Improvements                                                 $ 1,079,000      $    395,000
                  Buildings and Improvements                                              7,036,000         5,329,000
                  Equipment                                                               4,718,000         2,503,000
                  Vehicles                                                                  211,000           192,000
                                                                                        -----------      ------------

                                                                                         13,044,000         8,419,000
                  Less Accumulated Depreciation                                           5,561,000         4,066,000
                                                                                        -----------      ------------
                       Bank Premises and Equipment, Net                                 $ 7,483,000      $  4,353,000
                                                                                        ===========      ============
</TABLE>

             Depreciation charged to operating expenses was $433,000, $336,000,
             and $333,000 for the years ended December 31, 1998, 1997 and 1996,
             respectively.






                                       13

<PAGE>   40


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 7.  DEPOSITS

             Deposit accounts at December 31 are summarized as follows:
<TABLE>
<CAPTION>

                                                                                             1998             1997
                                                                                             ----             ----
<S>                                                                                     <C>              <C>
                  Non-interest bearing demand                                             $33,110,000    $ 19,572,000
                  Interest-bearing demand deposits                                         18,427,000      14,555,000
                  Savings deposits                                                         30,108,000      20,804,000
                  Money Market deposits                                                    30,338,000      16,467,000
                  Time deposits                                                           129,412,000      87,653,000
                                                                                         ------------    ------------
                  Total deposits                                                         $241,395,000    $159,051,000
                                                                                         ============    ============
</TABLE>


             The aggregate amount of short-term jumbo CDs, each with a minimum
             denomination of $100,000, was approximately $17,470,000 and
             $9,078,000 in 1998 and 1997, respectively. Interest expense on time
             deposits of $100,000 or more was approximately $724,000, $389,000
             and $356,000 for the years ended December 31, 1998, 1997 and 1996,
             respectively.

             At December 31, 1998, the scheduled maturities of CDs are as
             follows:
<TABLE>

<S>                                                                     <C>
                           1999                                         $ 76,190,000
                           2000                                           40,305,000
                           2001                                            9,935,000
                           2002                                            2,504,000
                           2003 and thereafter                               478,000
                                                                       -------------
                                                                       $ 129,412,000
                                                                       =============
</TABLE>

NOTE 8.  BORROWED FUNDS

             A summary of borrowed funds is as follows:
<TABLE>
<CAPTION>

                                                                                               1998             1997
                                                                                               ----             ----
<S>                                                                                      <C>               <C>
                  Term Loan                                                              $   7,673,000     $          -
                  Secured Advances from Federal Home Loan Bank of Chicago:
                      Fixed rate of 6.26%, due 6/16/98                                               -          400,000
                      Fixed rate of 5.44%, due 1/10/99                                         800,000          800,000
                      Fixed rate of 7.12%, due 4/17/00                                         150,000          150,000
                      Fixed rate of 5.71%, due 6/18/02                                       2,000,000        2,000,000
                      Fixed rate of 5.20%, due 12/11/02                                      1,500,000        1,500,000
                      Fixed rate of 4.70% due 1/15/08, callable 1/15/99                      1,000,000                -
                      Fixed rate of 5.30% due 1/16/08, callable 1/16/03                      4,000,000                -
                  Securities sold under an agreement to repurchase                           4,576,000       10,256,000
                  Federal funds purchased                                                            -        1,975,000
                                                                                         -------------     ------------
                                                                                         $  21,699,000     $ 17,081,000
                                                                                         =============     ============
</TABLE>

                  The scheduled principal maturities of borrowed funds at
December 31, 1998 are as follows:

<TABLE>
<S>                                                                      <C>
                           1999                                          $ 5,901,000
                           2000                                              710,000
                           2001                                              599,000
                           2002                                            4,139,000
                           2003                                            5,350,000
                           After 2003                                      5,000,000
                                                                         -----------
                                                                         $21,699,000
</TABLE>


             The term loan consists of a $6,000,000 loan with a fixed interest
             rate of 6.60% and a variable portion of $1,800,000 with a current
             rate of 7.10%. The loan requires quarterly principal and interest
             payments of $225,000 on the fixed portion and quarterly interest
             only payments on the variable portion. The total loan matures
             August 21, 2003. Collateral for this loan consists of the stock of
             the Bank.

             A covenant placed upon the Company includes limitations on further
             mergers without consent of the lender. The lender could also
             immediately call the loan if the Bank's aggregate outstanding
             balance of classified assets exceeds 50% of primary capital, if the
             Bank's tangible capital were less than 5% of total tangible assets,
             if the Bank's non-performing assets were greater than 25% of
             primary capital or if the total equity of the Bank were less than
             $30 million.

             Advances from the Federal Home Loan Bank of Chicago are
             collateralized by substantially all one-to-four family real estate
             loans.



                                       14

<PAGE>   41
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 9.  EMPLOYEE BENEFIT PLANS

         PENSION PLAN:

             Blackhawk has a noncontributory, defined contribution
             money-purchase pension plan covering substantially all of its
             employees. Blackhawk contributes, on behalf of the eligible
             employees, 4.2% of total annual compensation plus 4.2% of
             compensation in excess of $13,200. The total pension expense was
             $123,000, $104,000, and $78,000, for the years ended December 31,
             1998, 1997 and 1996, respectively.

         EXECUTIVE BONUS PLAN:

             The Company has adopted a revised incentive bonus plan for officers
             providing cash bonuses based upon the financial performance of the
             Company and performance of the respective officers. Bonus
             compensation expense was $92,000, $127,000, $159,000 for the years
             1998, 1997 and 1996, respectively.



         STOCK OPTION PLANS:

             The Company has reserved shares of common stock for issuance to
             directors and key employees under incentive and non-qualified stock
             option plans. Options are granted at prices equal to the fair
             market value and 90% of the fair market value on the dates of grant
             for directors and key employees, respectively, and are exercisable
             in cumulative installments over a three year period. Other
             pertinent information related to the plans is as follows:

<TABLE>
<CAPTION>

                                                           Weighted                  Weighted                  Weighted
                                                            Average                  Average                   Average
                                                1998         Price        1997         Price        1996         Price
                                                ----         -----        ----         -----        ----         -----
<S>                                          <C>          <C>          <C>          <C>          <C>          <C>
                  Shares under option,
                      beginning of year        295,576    $    7.59      275,776    $    7.02      262,235    $    6.72
                  Granted during the year       60,850        15.00       31,350        11.40       16,300        11.20
                  Terminated and canceled
                      during the year           (5,335)       11.38       (1,000)       11.25        (510)         5.85
                  Exercised during the year    (16,959)        5.74      (10,550)        3.92      (2,249)         5.25
                                             ---------    ---------    ---------    ---------    --------     ---------
                  Shares under option,
                      end of year              334,132    $    8.98      295,576    $    7.59      275,776    $    7.02
                                             =========    =========    =========    =========    =========    =========
                  Options exercisable,
                      end of year              252,281    $    7.32      217,592    $    6.57       84,492    $    5.73
                                             =========    =========    =========    =========    =========    =========
                  Available to grant,
                      end of year              338,150                    84,000                   115,300
                                             =========                 =========                 =========
                  Weighted average fair
                  value of options granted
                  during the year                         $    1.34                 $    5.74                 $    4.58
                                                          =========                 =========                 =========
</TABLE>


             Compensation expense related to granting compensatory employee
             stock options totaled $1,000, $36,000, and $43,000 in 1998, 1997
             and 1996, respectively.
<TABLE>
<CAPTION>

                                                    Outstanding Options              Vested Options
                                                    -------------------              --------------
                                  Year of       Outstanding      Weighted                       Weighted
                                Expiration     Shares Granted  Average Price  Shares Vested   Average Price
                                ----------     --------------  -------------  -------------   -------------
<S>                                <C>         <C>             <C>            <C>             <C>
                                   2000              4,200     $      3.33          4,200     $     3.33
                                   2001             16,950            3.16         16,950           3.16
                                   2002              5,250            4.33          5,250           4.33
                                   2003             93,249            5.26         93,249           5.26
                                   2004              7,350            6.83          7,350           6.83
                                   2005            106,633            9.38        106,633           9.37
                                   2006             16,300           11.20         10,866          11.20
                                   2007             23,350           11.41          7,783          11.41
                                   2008             60,850           15.00              -              -
                                               -----------     -----------    -----------     ----------
                                                   334,132     $      8.98        252,281     $     7.32
                                               ===========     ===========    ===========     ==========
</TABLE>







                                       15

<PAGE>   42
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

             The Company applies APB Opinion No. 25 in accounting for its stock
             options. Had compensation costs been determined on the basis of
             fair value pursuant to FASB Statement No. 123, net income and
             earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>

                                                                   1998            1997           1996
                                                                   ----            ----           ----
<S>                                                            <C>            <C>             <C>
                              Net Income:
                                  As reported                  $ 2,010,000    $ 1,956,000     $1,728,000
                                  Pro Forma                      1,898,000      1,862,000      1,644,000
                              Earnings Per Share:
                                  As reported:
                                     Basic                     $       .88    $       .86     $      .76
                                                               ===========    ===========     ==========
                                     Diluted                   $       .83    $       .81     $      .69
                                                               ===========    ===========     ==========
                                  Pro Forma:
                                     Basic                     $       .85    $       .82     $      .73
                                                               ===========    ===========     ==========
                                     Diluted                   $       .80    $       .78     $      .67
                                                               ===========    ===========     ==========
</TABLE>

             The fair value of each stock option grant has been estimated on the
             date of grant using the Black-Scholes option pricing model with the
             following weighted-average assumptions:

<TABLE>
<CAPTION>

                                                            1998           1997         1996
                                                            ----           ----         ----
<S>                                                       <C>             <C>          <C>
                              Risk-free interest rate           5%              5%           5%
                              Expected Life               10 years        10 years     10 years
                              Expected Volatility              17%             29%           3%
                              Expected Dividend Yield           3%              3%           3%
</TABLE>

         EMPLOYEE STOCK OWNERSHIP PLAN:

             The Company has an Employee Stock Ownership Plan for the benefit of
             employees who meet the eligibility requirements. The Plan was
             established in 1990. The Plan holds 112,101 shares of the Company's
             common stock in a trust established in Blackhawk. The stock was
             acquired by the Plan by using the proceeds from a loan obtained
             from a nonrelated commercial lender. The loan was collateralized by
             the stock which has not been allocated to individual participant
             accounts. In addition, the Company quaranteed this obligation. Cash
             payments to the Plan consist of contributions and dividend
             payments, in amounts sufficient for it to satisfy the debt service
             requirements. Accordingly, the debt has been recorded in the
             accompanying consolidated balance sheets together with the related
             deferred compensation. The debt and deferred compensation are
             reduced as the Plan makes principal payments.

             The loan required principal payments of $13,000, plus interest each
             quarter and was paid in full at December 31, 1997.

             Cash payments to the Plan during the years ended December 31, 1998,
             1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>

                                                                  1998            1997            1996
                                                                  ----            ----            ----
<S>                                                           <C>            <C>             <C>
                              Contributions                   $     36,000   $     36,000    $     33,000
                              Dividends                             38,000         38,000          36,000
                                                              ------------   ------------    ------------

                                                                    74,000         74,000          69,000
                                                              ============   ============    ============
</TABLE>

             For financial statement purposes, expense for the Plan is
             determined based on the percentage of shares allocated to
             participants each period (allocations are based on principal and
             interest payments) times the original amount of the debt plus the
             interest incurred. The components of the amount charged to expense
             for the years ended December 31, 1998, 1997 and 1996 are as
             follows:
<TABLE>
<CAPTION>

                                                                  1998            1997            1996
                                                                  ----            ----            ----
<S>                                                           <C>            <C>              <C>
                              Compensation                    $          -   $     36,000     $    33,000
                              Interest                                   -              -           5,000
                                                              ------------   ------------     -----------

                                                              $          -   $     36,000     $    38,000
                                                              ============   ============     ===========
</TABLE>

             In accordance with the applicable federal income tax regulations,
             Blackhawk is expected to honor the rights of certain participants
             to diversify their vested account balances or to liquidate their
             vested ownership of the stock in the event of employment
             termination. The purchase price of the stock is based on the market
             value. In addition, the deferred compensation recorded in
             connection with the debt incurred by the Plan has been offset
             against the stock.

         401(K) PROFIT-SHARING PLAN:

             Rochelle and Belvidere have profit-sharing plans which meets the
             qualifications of Section 401(k) of the Internal Revenue Code
             (Code). Under the Plan, employees 21 years of age or older with one
             year of service and 1,000 hours of service during that period may
             make pre-tax contributions up to applicable limits under the Code.
             Employees are 100% vested in their contributions. Discretionary
             employer contributions vest at a rate of 20% per year beginning on
             the third year of service by an employee. Contributions totaling
             $12,000 and $10,000 were made during the years ended December 31,
             1998 and 1997, respectively.



                                       16

<PAGE>   43
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

         DEFERRED COMPENSATION PLAN:

             In addition, Blackhawk assumed deferred compensation agreements
             with certain officers of Rochelle. Amounts are accumulated in an
             account from which benefits will be paid to the officers at
             termination or retirement. As of December 31, 1998 and 1997
             deferred compensation liability totaled $273,000 and 251,000,
             respectively.

             The agreements also provide for an acceleration of benefits upon
             the deaths of these officers, payable to their beneficiaries.
             Rochelle has purchased life insurance policies on the lives of the
             officers in order to fund the acceleration of benefits at death.
             Rochelle is owner and beneficiary of these policies which provide
             for death benefits totaling $1,307,000 and $1,303,000 as of
             December 31, 1998 and 1997, respectively. These policies have a
             cash surrender value of $583,000 and $556,000 as of December 31,
             1998 and 1997, respectively.

NOTE 10. INCOME TAXES

             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 net
             deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>

                                                                                     1998                1997
                                                                                     ----                ----
<S>                                                                           <C>                 <C>
                     Deferred Tax Liabilities:
                          Property and Equipment                              $      (473,000)    $   (226,000)
                          Unrealized gains on securities available-for-sale           (75,000)         (19,000)
                          Purchase Accounting                                        (525,000)        (575,000)
                          Mortgage Servicing Rights                                  (342,000)        (128,000)
                          Other                                                       (89,000)         (74,000)
                                                                              ---------------     ------------
                              Total Deferred Tax Liabilities                       (1,504,000)      (1,022,000)
                                                                              ---------------     ------------

                     Deferred Tax Assets:
                          Reserve for loan losses                                     706,000           451,000
                          Accrued liabilities                                         538,000           104,000
                          State net operating loss carryovers                          58,000                 -
                                                                              ---------------     -------------
                              Total Deferred Tax Assets                             1,302,000           555,000
                                                                              ---------------     -------------

                              Net Deferred Tax Liabilities                    $      (202,000)    $   (467,000)
                                                                              ===============     ============
</TABLE>

             The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                               1998                 1997                1996
                                                               ----                 ----                ----
<S>                                                     <C>                  <C>                 <C>
                     Current tax expense:
                          Federal                       $       989,000      $        957,000    $      779,000
                          State                                 225,000               129,000            95,000
                                                        ---------------      ----------------    --------------

                              Total Current                   1,214,000             1,086,000           874,000
                                                        ---------------      ----------------    --------------

                     Deferred tax provision (credit):
                          Federal                                28,000               (13,000)          (15,000)
                          State                                 (53,000)               (6,000)          (11,000)
                                                        ---------------      ----------------    --------------

                              Total Deferred                    (25,000)              (19,000)          (26,000)
                                                        ---------------      ----------------    --------------
                              Total provision for
                              income taxes              $     1,189,000      $      1,067,000    $      848,000
                                                        ===============      ================    ==============
</TABLE>

             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>

                                                                    1998                1997              1996
                                                                    ----                ----              ----
<S>                                                          <C>                  <C>               <C>
                     Tax expense at statutory rate           $     1,088,000      $   1,028,000     $    876,000
                     Increase (decrease) in taxes
                     resulting from:
                          Tax exempt interest                        (89,000)           (59,000)         (75,000)
                          State income taxes, net of
                     federal                                         114,000             76,000           56,000
                           tax benefit
                          Amortized of goodwill and
                          other intangibles                          122,000             62,000
                          Other                                      (46,000)           (40,000)          (9,000)
                                                             ---------------      -------------     ------------
                     Provision for income taxes              $     1,189,000      $   1,067,000     $    848,000
                                                             ===============      =============     ============
</TABLE>





                                       17

<PAGE>   44

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME

             Comprehensive income is shown in the statement of changes in
             shareholders' equity. The Company's accumulated other comprehensive
             income is comprised of the unrealized gain or loss on securities
             available for sale. The following shows the activity in accumulated
             other comprehensive income:
<TABLE>
<CAPTION>

                                                                                1998              1997
                                                                                ----              ----
<S>                                                                       <C>               <C>
                  Accumulated other comprehensive income (deficit) at     $        38,000   $     (11,000)
                  beginning
                  Activity:
                      Unrealized gain on securities available for sale            398,000          74,000
                      Tax impact                                                 (143,000)        (25,000)
                                                                          ---------------   -------------
                  Net unrealized gain on securities available for sale            255,000          49,000
                                                                          ---------------   -------------
                  Accumulated other comprehensive income at end           $       293,000   $      38,000
                                                                          ===============   =============
</TABLE>


NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

             The Company is a party to financial instruments with
             off-balance-sheet risk, acquired in the normal course of business
             to meet the financing needs of its customers. These financial
             instruments include various commitments to extend credit and
             standby letters of credit. These instruments involve, to a varying
             degree, elements of credit risk in excess of the amount recognized
             in the balance sheet. The contract amounts of these instruments
             reflect the extent of involvement Company has in particular classes
             of financial instruments.

             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 as it
             does for on-balance-sheet instruments.

             Standby letters of credit are conditional commitments issued by the
             Company to guarantee the performance of a customer to a third
             party. The credit risk involved in issuing letters of credit is
             essentially the same as that involved in extending loans to
             customers. The Company holds collateral supporting those
             commitments for which collateral is deemed necessary. Because these
             instruments have fixed maturity dates and because many of them
             expire without being drawn upon, they do not generally present any
             significant liquidity risk to the Company.

             The Company frequently enters into loan sale commitments prior to
             closing loans in order to limit interest rate risk for the period
             of time between when a loan is committed and when it is sold. These
             sale commitments are typically made on a loan by loan basis.

             A summary of the amount of Company's exposure to credit loss for
             loan commitments (unfunded loans and unused lines of credit) and
             standby letters of credit outstanding at December 31, 1998 and 1997
             was as follows:
<TABLE>
<CAPTION>

                                                                  1998              1997
                                                                  ----              ----
<S>                                                          <C>              <C>
                    Loan Commitments                         $ 40,213,000     $ 20,883,000

                    Standby Letters of Credit                $    161,000     $    583,000

                    Commitments to Sell                      $  6,675,000     $  1,459,000
</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
             the commitments may expire without being drawn upon, the total
             commitment amounts do not necessarily represent future cash
             requirements. The Company evaluates each customer's credit
             worthiness on a case-by-case basis. The amount of collateral
             obtained, if deemed necessary by Company upon extension of credit,
             is based on management's credit evaluation. Collateral varies but
             may include accounts receivable, inventory, property, plant and
             equipment, income-producing commercial properties and real estate.

NOTE 13. LEASE COMMITMENTS

             The Bank leases two branch office locations in Beloit, Wisconsin
             under leases expiring November 2014 and July 2012. The leases can
             be terminated every five years, but the Bank could be liable for
             remodeling or removal costs to the leased office spaces if the
             leases are terminated before the 14th year of the agreements.

             The Bank also leases an office in Roscoe, Illinois under a lease
             expiring in December 2002. The lease is subject to inflationary
             adjustments after three years from occupancy. In addition, the Bank
             is obligated to pay a portion of the real estate taxes, insurance,
             and common area maintenance.

             The total minimum rental commitment under the leases at December
             31, 1998 is as follows:





                                       18

<PAGE>   45
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 13. LEASE COMMITMENTS (CONTINUED)

<TABLE>
<CAPTION>

                         Year Ending December 31:
                         <S>                            <C>
                                     1999               $    95,000
                                     2000                   108,000
                                     2001                   108,000
                                     2002                   108,000
                                2003 and later            1,023,000
                                                        -----------
                                                        $ 1,442,000
</TABLE>


             Total rent expense for the years ended December 31, 1998, 1997 and
             1996 was $92,000, $49,000, and $36,000, respectively.

NOTE 14. EARNINGS PER SHARE

             Basic earnings per share are arrived at by dividing net income
             available to common shareholders by the weighted-average number of
             common shares outstanding and do not include the impact of any
             potentially dilutive common stock equivalents. The diluted earnings
             per share calculation is arrived at by dividing net income by the
             weighted-average number of shares outstanding, adjusted for the
             dilutive effect of outstanding stock options, and any other common
             stock equivalents. The following table shows the computation of the
             basic and diluted earnings per share:

<TABLE>
<CAPTION>

                                                                     Income               Share          Per Share
                                                                  (Numerator)         (Denominator)       Amount
<S>                                                           <C>                   <C>                <C>
                  For the Year Ended December 31, 1998
                  Basic Earnings Per Share                    $     2,010,000           2,296,636      $    0.88
                                                              ===============                          =========
                  Effect of Dilutive Stock Options                                        120,283
                                                                                    -------------
                  Diluted Earnings Per Share                  $     2,010,000           2,416,919      $    0.83
                                                              ===============       =============      =========

                  For the Year Ended December 31, 1997
                  Basic Earnings Per Share                    $     1,956,000           2,283,428      $    0.86
                                                              ===============                          =========
                  Effect of Dilutive Stock Options                                        101,160
                                                                                    -------------
                  Diluted Earnings Per Share                  $     1,956,000           2,384,588      $    0.82
                                                              ===============       =============      =========

                  For the Year Ended December 31, 1996
                  Basic Earnings Per Share                    $     1,728,000           2,279,494      $    0.76
                                                              ===============                          =========
                  Effect of Dilutive Stock Options                                         92,973
                                                                                    -------------
                  Diluted Earnings Per  Share                 $     1,728,000           2,372,467      $    0.73
                                                              ===============       =============      =========
</TABLE>



NOTE 15. COMMON STOCK SPLIT

             On June 15, 1996 the Company issued the 759,301 additional shares,
             at $.01 per share par value, necessary to effect a 3 for 2 common
             stock split.

NOTE 16. SEGMENT INFORMATION

             The Company, through the branch network of its subsidiary,
             Blackhawk, provides a full range of consumer and commercial banking
             services to individuals, businesses, and farms in southern
             Wisconsin and northern Illinois. These services include demand,
             time and savings deposits; safe deposit services; credit cards;
             secured and unsecured consumer, commercial, and real estate loans;
             ATM processing; cash management; and trust services. While the
             Company's chief decision makers monitor the revenue streams of the
             various products and services, operations are managed and financial
             performance is evaluated on a Company-wide basis. Accordingly, all
             of the Company's banking operations are considered by management to
             be aggregated in one reportable operating segment.

NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS

             Fair value estimates, methods, and assumptions for the Company's
             financial instruments are summarized below.

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

             Cash, cash equivalents and federal funds sold: For these short-term
             instruments, the carrying amount is a reasonable estimate of fair
             value.

             Securities: For securities, fair value equals quoted market price,
             where available. If a quoted market price is not available, fair
             value is estimated using quoted market prices for similar
             securities.


                                       19

<PAGE>   46

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

             Loans receivable: The fair value of loans is estimated by
             discounting the future cash flows using the current rates at which
             similar loans would be made to borrowers with similar credit
             ratings for the same remaining maturities.

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

             Short-term and long-term borrowings: The carrying amounts of
             variable-rate borrowings and notes payable approximate their fair
             values. The fair value of fixed rate borrowings is estimated using
             rates currently available for debt with similar terms and remaining
             maturities.

             Off-balance sheet financial instruments: The fair value of
             off-balance sheet instruments was estimated based on the amount the
             Company would pay to terminate the contracts or agreements, using
             current rates and, when appropriate, the current creditworthiness
             of the customer.

             The estimated fair values of the Company's financial instruments
             are as follows:

<TABLE>
<CAPTION>

                                                          December 31, 1998                December 31, 1997
                                                          -----------------                -----------------
                                                      Carrying                         Carrying
                                                       Amount        Fair Value         Amount         Fair Value
                                                           (in thousands)                   (in thousands)
<S>                                                   <C>            <C>               <C>             <C>
             Financial Assets
               Cash, cash equivalents, federal funds
                  sold and other short term investments  15,973          15,973            8,680           8,680
                 Federal funds sold and other
                    short-term investments               15,335          15,335            8,889           8,889
                 Securities                              60,371          60,563           38,408          38,586
                 Loans, net of allowance for
                    loan losses                         180,389         183,500          136,774         137,243

             Financial Liabilities and Other
                 Off-balance Sheet Instruments:
                    Demand deposit and savings          112,157         112,157           71,398          71,402
                    Time deposits                       129,238         133,194           87,653          87,923
                    Borrowings                           21,699          21,396           17,081          17,114
                 Loan Commitments                             -               -                -               -
                 Standby Letters of Credit                    -               -                -               6

</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 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 that could 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. Deposits with no
             stated maturities are defined as having a fair value equivalent to
             the amount payable on demand. This prohibits adjusting fair value
             derived from retaining those deposits for an expected future period
             of time. This component, commonly referred to as a deposit base
             intangible, is neither considered in the above amounts nor is it
             recorded as an intangible asset on the balance sheet. Significant
             assets and liabilities that are not considered financial assets and
             liabilities include premises and equipment. 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.

NOTE 18. REGULATORY MATTERS


             The Company and the Bank are 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
             and the Bank's financial statements. Under capital adequacy
             guidelines and regulatory framework for prompt corrective action,
             the Company and the Bank must meet specific capital guidelines that
             involve quantitative measures of the assets, liabilities, and
             certain off-balance sheet items as calculated under regulatory
             accounting practices. The capital amounts and classification are
             also subject to qualitative judgements by the regulators about
             components, risk weightings, and other factors.

             Quantitative measures established by regulation to ensure capital
             adequacy require the Company and the Bank to maintain minimum
             amounts and ratios (set forth in the table below) of total capital
             and Tier I capital (as defined in the regulations) to risk-



                                       20

<PAGE>   47
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 18. REGULATORY MATTERS (CONTINUED)


             weighted assets (as defined), and the Tier I capital (as defined)
             to average assets (as defined). Management believes, as of December
             31, 1998, that the Company and the Bank meet all capital adequacy
             requirements to which it is subject.

             As of December 31, 1998, the most recent notification from the FDIC
             categorized the Bank as well capitalized under the regulatory
             framework for prompt corrective action. To be categorized as well
             capitalized, the Company and the Bank must maintain minimum total
             risk-based, Tier I risk-based, and Tier I leverage ratios as set
             forth in the table. There are no conditions or events since that
             notification that management believe have changed the Company and
             the Bank's category.

             The actual capital amounts and ratios as of December 31, are also
             presented in the table (in thousand's).

<TABLE>
<CAPTION>

                                                                                                        To be Well
                                                                                                        Capitalized
                                                                                For Capital            Under prompt
                                                           Actual            Adequacy Purposes          Corrective
                                                                                                     Action Provisions
                  As of December 31, 1998:            Amount      Ratio      Amount      Ratio       Amount      Ratio
                                                      ------      -----      ------      -----       ------      -----
<S>                                                   <C>         <C>        <C>           <C>       <C>          <C>
                  Company
                  -------
                      Total Capital (To Risk
                         Weighted Assets)             18,746      9.31%      16,111        8.0%
                      Tier I Capital (To Risk
                         Weighted Assets)             16,830      8.36%       8,055        4.0%
                      Tier I Capital (To
                         Average Assets)              16,830      6.00%       8,744        3.0%
                  Bank
                  ----
                      Total Capital (To Risk
                         Weighted Assets)             25,704     12.79%      16,075        8.0%      20,093      10.0%
                      Tier I Capital (To Risk
                         Weighted Assets)             23,788     11.84%       8,037        4.0%      12,056       6.0%
                      Tier I Capital (To
                         Average Assets)              23,788      8.50%      11,488        4.0%      14,360       5.0%
                  As of December 31, 1997:
                  Company
                  -------
                      Total Capital (To Risk
                         Weighted Assets)           $ 22,895     18.67%    $  9,811        8.0%
                      Tier I Capital (To Risk
                         Weighted Assets)             21,373     17.43%       4,905        4.0%
                      Tier I Capital (To
                         Average Assets)              21,373     11.79%       5,439        3.0%
                  Blackhawk - Beloit
                  ------------------
                      Total Capital (To Risk
                         Weighted Assets)             19,253     18.22%       8,456        8.0%      10,570      10.0%
                      Tier I Capital (To Risk
                         Weighted Assets)             18,092     17.12%       4,228        4.0%       6,342       6.0%
                      Tier I Capital (To
                         Average Assets)              18,092     12.43%       5,822        4.0%       7,277       5.0%
                  Blackhawk - Rochelle
                  --------------------
                      Total Capital (To Risk
                         Weighted Assets)              2,932      8.48%       2,765        8.0%       3,456      10.0%
                      Tier I Capital (To Risk
                         Weighted Assets)              2,621      7.58%       1,382        4.0%       1,728       6.0%
                      Tier I Capital (To
                         Average Assets)               2,621      5.29%       1,982        4.0%       2,479       5.0%

</TABLE>

NOTE 19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

         CONDENSED PARENT COMPANY BALANCE SHEETS:
<TABLE>
<CAPTION>

                                                                                1998                   1997
                                                                                ----                   ----
<S>                                                                    <C>                     <C>
              ASSETS
                  Cash and cash equivalents                            $        791,000        $       136,000
                  Investment in subsidiaries                                 31,212,000             22,411,000
                  Investment securities available-for-sale                      189,000                      -
                  Investment securities held-to-maturity                              -                110,000
                  Due from subsidiaries, net                                    105,000                697,000
                  Other assets                                                  156,000                 89,000
                                                                       ----------------        ---------------

                      Total Assets                                     $     32,453,000        $    23,443,000
                                                                       ================        ===============
</TABLE>


                                       21

<PAGE>   48
                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)

<TABLE>
<S>                                                                    <C>                     <C>
              LIABILITIES AND SHAREHOLDERS' EQUITY
                  Liabilities:
                      Other borrowings                                 $      7,673,000        $              -
                      Other liabilities                                         380,000                 308,000
                                                                       ----------------        ----------------
                            Total Liabilities                                 8,053,000                 308,000
                                                                       ----------------        ----------------
                  Shareholders' Equity:
                      Preferred Stock                                                 -                       -
                      Common Stock                                               23,000                  23,000
                      Additional paid in capital                              7,229,000               7,133,000
                      Retained earnings                                      16,975,000              16,045,000
                      Less treasury stock, at cost                             (120,000)               (104,000)
                      Accumulated other comprehensive income                    293,000                  38,000
                                                                       ----------------        ----------------
                      Total Shareholders' Equity                             24,400,000              23,135,000
                                                                       ----------------        ----------------
                      Total liabilities and shareholders' equity       $     32,453,000        $     23,443,000
                                                                       ================        ================
              CONDENSED PARENT COMPANY STATEMENTS OF INCOME:

                                                                           1998            1997            1996
                                                                           ----            ----            ----
                   Income:
                      Dividends from subsidiaries                      $ 1,800,000    $  1,750,000    $ 1,436,000
                      Interest income                                       20,000          74,000        171,000
                                                                       -----------    ------------    -----------
                         Total Income                                    1,820,000       1,824,000      1,607,000
                                                                       -----------    ------------    -----------
                   Expenses:
                      Interest Expense                                     169,000               -              -
                      Professional fees                                     46,000          27,000         33,000
                      Other                                                 44,000          44,000         31,000
                                                                       -----------    ------------    -----------
                         Total Expenses                                    259,000          71,000         64,000
                                                                       -----------    ------------    -----------
                   Income before income tax benefits and equity in
                   undistributed net income of subsidiaries              1,561,000       1,753,000      1,543,000
                   Income tax expense (benefits)                           (73,000)              -         10,000
                                                                       -----------    ------------    -----------
                   Income before equity in undistributed net income of
                      Subsidiaries                                       1,634,000       1,753,000      1,533,000
                   Equity in undistributed net income of subsidiaries      376,000         203,000        195,000
                                                                       -----------    ------------    -----------
                         Net Income                                    $ 2,010,000    $  1,956,000    $ 1,728,000
                                                                       ===========    ============    ===========

<CAPTION>

         CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
                                                                           1998            1997            1996
                                                                           ----            ----            ----
<S>                                                                    <C>            <C>             <C>
              Cash Flows From Operating Activities
                   Net income                                          $ 2,010,000    $  1,956,000    $ 1,728,000
                   Adjustments to reconcile net income to net cash
                      provided by operating activities:
                   Compensatory employee stock options recognized           (1,000)         36,000         43,000
                   Amortization of intangible assets                        28,000          13,000              -
                   Equity in undistributed net income of subsidiaries     (376,000)       (203,000)      (195,000)
                   (Increase) decrease in due from subsidiaries            650,000          44,000       (170,000)
                   Accretion of discounts on investment securities, net          -         (35,000)       (46,000)
                   (Increase) decrease in other assets                    (745,000)         39,000         (1,000)
                   Increase in other liabilities                            25,000          31,000         63,000
                                                                       -----------    ------------    -----------
                   Net cash provided by operating activities             1,591,000       1,881,000      1,422,000
                                                                       -----------    ------------    -----------

              Cash Flows From Investing Activities
                   Purchase of securities                                        -      (4,967,000)    (5,334,000)
                   Proceeds from maturity of securities                    110,000       7,090,000      5,309,000
                   Payments for investments in subsidiary              (12,636,000)     (4,233,000)             -
                   Repayment of investments in subsidiaries              4,915,000               -              -
                                                                        ----------    ------------    -----------
                       Net cash used in investing activities            (7,611,000)     (2,110,000)       (25,000)
                                                                       -----------   -------------    -----------
              Cash Flows From Financing Activities
                   Proceeds from long-term debt                          7,800,000               -              -
                   Repayment of long-term debt                            (127,000)              -              -
                   Dividends paid                                       (1,080,000)       (983,000)      (866,000)
                   Proceeds from sale of common stock                       98,000          42,000         14,000
                   Purchase of common stock for treasury                   (16,000)        (20,000)       (84,000)
                                                                       -----------   -------------    -----------
                       Net cash provided by (used in) financing
                         activities                                      6,675,000        (961,000)      (936,000)
                                                                        ----------    -------------   -----------
                   Increase (decrease) in cash and cash equivalents        655,000      (1,190,000)       461,000
              Cash and Cash Equivalents:
                       Beginning                                           136,000       1,326,000        865,000
                                                                        ----------    ------------    -----------
                       Ending                                           $  791,000    $    136,000    $ 1,326,000
                                                                        ==========    ============    ===========

</TABLE>






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