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

[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, 1997
                                       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, 1997 was $15,843,928

As of March 20, 1998, 2,287,136 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 20, 1998) 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 $19,882,766.

                      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 14, 1997, dated
April 2, 1997.

                   Index of Exhibits on Page 63.Page  1 of 72


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                            BLACKHAWK BANCORP, INC.

                        FORM 10-KSB - TABLE OF CONTENTS


                                  PART I  PAGE

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

Item 2 Properties.................................................       10

Item 3 Legal Proceedings .........................................       11

Item 4 Submission of Matters To a Vote of Security Holders........       11

PART II

Item 5   Market for the Registrant's Common Stock and
      Related Stockholder Matters.................................       11

Item 6   Management's Discussion and Analysis of
      Financial Condition and Results of
      Operations..................................................       11

Item 7   Financial Statements and Supplemental Data...............       18

Item 8   Changes in and Disagreements with
      Accountants on Accounting and Financial
      Disclosure..................................................       60

PART III

Item 9   Directors and Executive Officers of the
      Registrant..................................................       60

Item 10   Executive Compensation..................................       60

Item 11   Security Ownership Of Certain Beneficial
       Owners and Management......................................       60

Item 12   Certain Relationships and Related
       Transactions...............................................       60

PART IV

Item 13    Exhibits, Financial Statement Schedules, and
       Reports on Form 8-K........................................       60

Signatures........................................................       61



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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
two subsidiariy finacial institutions (the "Bank's"), Blackhawk State Bank
("Beloit"), located in Beloit, Wisconsin, and Blackhawk State Bank, s.b.
("Rochelle"), located in Rochelle, Illinois.

Beloit is a Wisconsin - chartered commercial bank operating out of five
branches in the Greater Beloit Area, three conventional branches and two
in-store branches.   Beloit has one subsidiary, Nevahawk Investments, Inc.
("Nevahawk") discussed below under "Investment Activities".  Beloit's principal
business consists of attracting deposits from the general public and
originating loans.  In addition, Beloit invests in various types of securities,
operates a trust department and maintains an office of Robert Thomas
Securities, Inc.

As of May 1, 1997, the Company acquried substantially all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle"), which wholly owned all of the
shares of Rochelle Savings Bank ("Savings Bank").  Subsequent to this purchase,
the Savings Bank's name was changed to Blackhawk State Bank, s.b.  Rochelle
operates out of one branch in Rochelle, Illinois and one in Oregon, Illinois.
Rochelle has also received approval to open a branch in Roscoe, Illinois.  This
branch opened March 9, 1998.  Rochelle also wholly owns Midland Acceptance
Corp. ("Midland").  Midland is a finance company with office locations in
Rochelle and Rockford, Illinois.  Rochelle's principal business consists of
attracting deposits from the general public and originating loans.  Subsequent
to the Company's year-end, an application has been made to branch the
operations of Rochelle into those of Beloit.  It is expected that this will
occurr March 31, 1998.

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 services, service charges and trust department fees.

LENDING ACTIVITIES.  A majority of the loans in the Bank's loan portfolios 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 main offices.  Management of the Company has restructured the loan
portfolio of Beloit to decrease the concentration of mortgage loans and
increase commercial and installment loans.  Management of the Company
ancticipates the same restructuring of the loan portfolio of Rochelle.  The
Analysis of Loan Portfolio, Table 2 of Item 7, shows the changes in the types
of loans from 1995 through 1997.

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 junior liens on real
estate, automobiles or boats.  A substantial percentage of automobile and boat
loans in Beloit's portfolio were purchased from area dealers.  Beloit also
offers credit cards and home equity lines of credit.

Rochelle serivces approximately $42.0 million in single one-to-four family
loans in addition to the loans recorded on it's books.  Substantially all of
these loans are 100% sold to the Federal Home Loan Mortgage Corporation
("Freddie Mac").  Rochelle is beginning the process of originating consumer and
installment loans.  Prior to this, Midland was the source of the majority of
its consumer type loans.  Midland generally is a sub-prime lender, and has
approximately $2.0 million in outstanding loans.

INVESTMENT ACTIVITIES.  The investment policy under which the Company and its
subsidiaries operate 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 subsidiaries
intention to hold securities until maturity and are classified as such for
IRS purposes.  The Financial Accounting Standards Board ("FASB") Statement 115
was adopted in 1994.  Generally, the securities held by Beloit are


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classified as available-for-sale whereas the securities held by the
Company, Nevahawk and Rochelle are classified as held-to-maturity.

Beloit's portfolio, approximately $9.0 million, is managed at its main office.
Beloit 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.

Rochelle's portfolio, approximately $6.0 million, is managed at its main
office. Rochelle  may purchase the same types of securities under the same
general restrictions as are noted above.  The majority of Rochelle's portfolio
is in shorter-term maturities.

The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above.   At December 31, 1997 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's have few depositors with account balances in excess of
$100,000, during 1997 Beloit acquired approximately $1.0 million in brokered
deposits.  The Bank's 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 Beloit 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 Blackhawk Beloits's main location.


OTHER SERVICES.  The Bank's provide a wide range of other banking services for
both retail and commercial customers.  Beloit also provides full-service
brokerage services through Robert Thomas Securities, Inc. and Rochelle
provides mutual fund and annuity sales through AON services.

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's 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, 1997, the Company and the Bank's had 126
employees, of  which 103 were employed on a full time basis.  The fringe
benefits generally provided to qualified employees include health insurance,
long-term disability insurance, a flexible compensation plan (cafeteria plan),
a defined non-contributory pension plan and an employee stock ownership
plan.  Management considers its relations with employees to be excellent.


SUPERVISION AND REGULATION.  The Company and the Bank's 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.



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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.  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's 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.


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 stockholders'
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, 1997.  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's.  Wisconsin-chartered banks, including the Beloit, 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.


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



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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 Beloit from retained earnings without any tax
consequences.  There are no plans, at the present, for Nevahawk to pay
dividends in 1998.  This status will be reviewed by Nevahawk at its regular
board meetings.



FEDERAL DEPOSIT INSURANCE CORPORATION.  Both of 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.  As a result, the Bank's will pay an assessment ranging from
$.0124 to $.0067 per hundred dollars of deposits.  This is expected to occur
through the year 2003.


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's are also subject to federal
and state statutory and regulatory provisions covering, among other things,
security procedures, currency reporting, insider and affiliated party
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's and



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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 subsidiary 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, 47     President and Chief Executive Officer of the
                                Company and of the Bank.  Prior thereto, Vice
                                President-Controller, Regal-Beloit Corporation.

     James P. Kelley,  54       Executive Vice President and Secretary of the
                                Company and Executive Vice President of
                                the Bank and the Bank's predecessor, Beloit
                                Savings Bank.

     Jesse L. Calkins, 57       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, 53       Vice President Commercial Lending of the Bank
                                since August 1990.  Prior thereto, Vice
                                President Commercial Loans, M & I Bank of
                                Beloit.


ITEM 2.  PROPERTIES

On December 31, 1997, the Company had eleven locations, of which five were
leased.  All of these offices are considered by management to be well
maintained and adequate for the purpose intended.  See the Notes to
Consolidated Finacial 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

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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 1997.

                                    PART II

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

As of March 20, 1998 there were 403 Registered Stockholders.  Information in
response to this item is found on page   of this report.  A table listing the
declaration of dividends is found on page   .

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

The following discussion provides additional analysis of the financial
statements presented in the Company's 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 1997, with comparisons to 1996
and 1995 where applicable.  As of December 31, 1997, Blackhawk State Bank
("Beloit") and Blackhawk State Bank, S.B. ("Rochelle") of Rochelle, IL., were
the direct subsidiaries of the Company and their operations contributed
nearly all of the revenue and expenses for the year. Rochelle has offices in
Rochelle and Oregon, IL.  Beloit's wholly-owned subsidiary, Nevahawk
Investment, Inc. ("Nevahawk") is an investment subsidiary located in Nevada.
Rochelle has a subsidiary, 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.

Overview

Rochelle was acquired on April 30, 1997 and was accounted for using the
purchase method of accounting.  As a result of this, the financial information
prior to the acquisition date has not been restated to include Rochelle. As of
December 31, 1997, total assets of the Company were $202.0 million, an increase
of 33.3% from $151.5 million as of December 31, 1996.  Net income for 1997 was
$1.96 million or  $.86 per share, increasing 13.2% from  $1.73 million or $.75
per share in 1996, which was 17.6% greater than the $1.47 million or $.64 per
share, in 1995.  The diluted earnings per share were $.82, $.73, and $.63 for
1997, 1996, and 1995, respectively.  The significant items resulting in the
above-mentioned results are discussed below.

Net Interest income

Net interest income 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 securities which are
not fully subject to  federal taxes as if they were fully subject to federal
taxes. Net interest income in 1997 was a record $7.65 million, increasing 26.2%
over the 1996 level of $6.03 million which in turn was 8.2%  over the 1995 net
interest income of $5.60 million. Net interest income  as a percentage of
average earning assets was 4.5% in 1997, 4.3% in 1996, and 4.3% in 1995.


Higher interest income and fees on loans was the largest factor in the 32.1%
increase of net interest income 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 income.  Total
loan volumes increased 38.5% for this same period.  Although commercial and
consumer loans increased in 1997 overall, their percentage of the portfolio did
not increase.  Real estate loans increased in total dollars and as a percentage
of the portfolio.  The increase in real estate loans was significantly impacted
by the inclusion of the assets of Rochelle which is predominantly a mortgage
lender.


Investment income increased 8.2%, to $2.55 million in 1997 compared to $2.45
million in 1996.  The increase in this area 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

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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.  Since Rochelle was purchased
on April 30, 1997, first and second quarter comparisons and annual
comparisons of interest income in 1998 should continue to show significant
increases.


Increases in investment income, interest income, and fees on loans were the
largest factors in the increase of net interest income in 1996.  Investment
income increased 11.9% and interest income and fees on loans increased 5.4%.
Nearly all of the increases in these areas were the result of increased
volumes.  The average balance of investments increased by 9.6% in 1996 compared
to 1995.  Total loans increased 3.3% for this same period.  Commercial and
consumer loans continued to increase in their percentage  of the total loan
portfolio during 1996 while real estate loans continued to decline as a
percent of the portfolio.


Total interest expense increased to $6.72 million in 1997 from $5.39 million in
1996, an increase of nearly 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 fairly static at 4.70% and
4.71% in 1997 and 1996, respectively.  The variance in interest expense between
1997 and 1996 in other borrowings was the result of reduced volume.  The
average cost of borrowings also declined in 1997 to 4.77% compared to 4.80% in
1996.  The statement regarding the effect of the Rochelle purchase on interest
income comparisons in 1997 also applies to interest expense.


Interest expense on interest bearing liabilities increased 6.2% in 1996
compared to 1995. Approximately 84% of  the increase  was due to increased
volume in short-term borrowings.  These borrowings were in the form of
repurchase agreements.  The increased cost of interest bearing deposits was due
to increased rates.  In order to fund loan demand and leverage its capital
base, the Company has taken advances from the Federal Home Loan Bank  ("FHLB")
and accepted repurchase agreements from local municipalities.  FHLB advances
have been taken to fund specific loans in the past.  Because of the relatively
attractive rates being offered, FHLB advances have been, and may in the future,
be used to fund other cash needs.  The repurchase agreements are acquired on a
bid basis with varying periods for rebid.  Long-term loans are  not funded with
repurchase agreements.  Also, short-term borrowings include federal funds
purchased.  As short-term liquidity needs arise, the Company may buy federal
funds, secure advances from the FHLB, or borrow from the Federal Reserve Bank.


OTHER OPERATING INCOME AND EXPENSE

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 was from the
inclusion of the new Rochelle operations.  Loan servicing fees accounted for
$95,000 of new income in 1997.  Prior to the acquisition of Rochelle, the
Company did not have income from this activity.  This income category is
expected to continue to increase in the future.  Trust fees and investment
center commissions also experienced significant percentage gains in 1997
compared to 1996.  Gains in both of these areas are expected in 1998 compared
to 1997.


Excluding security gains, other operating income increased by $246,000, or
32.3% in 1996 compared to 1995.  The areas accounting for most of this increase
were trust fees, which increased $34,000 or 38.7%, service fees, which
increased $101,000 or 21.6%, gain on the sale of loans, which was higher by
$37,000 or 98.4%, credit card fees that were up by $15,000 or 23.3% and net
investment center commissions, which grew by $32,000 or 47.8%.


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. Also, the opening of a second in-store facility in a newly
constructed Wal-Mart contributed to some of the increase.  Savings are expected
in 1998 in several areas of expense as a result of the consolidation of
activities of Beloit and Rochelle.  Some of these savings will be offset by
additional expenses incurred in the opening of a branch facility in Roscoe,
Illinois in March, 1998.

                                     9

<PAGE>   10

Other operating expense increased $185,000 or 4.6% in 1996 compared to 1995.
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.


Salaries increased $127,000 or 7.8% in 1996 compared to 1995.  This increase
was the result of additional new employees hired during 1995, normal salary
increases and an increase in the officer incentive compensation related to
improved financial performance.  The increase in employee benefits of $79,000
or 22.2%, is primarily the result of increased health insurance costs.  The
other major area of increase was other expenses which increased $121,000 or
20.3%.  Two areas that accounted for approximately 54.0% of this increase were
office supplies and postage.  A significant decrease in FDIC premiums of
$125,000 in 1996 was due to the elimination of premiums for banks that were
most highly rated.  A $33,000, or 8.7%, reduction in equipment expenses was
primarily the result of reduced depreciation costs.


Management tracks 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
as a percentage of average assets was 2.38% in 1997, 2.15% in 1996 and 2.31% in
1995. The standard efficiency ratio (other operating expense divided by net
operating income) was 64.8%, 60.8%, and 64.1% in 1997, 1996 and 1995,
respectively.  The gross efficiency ratio (other operating expense divided by
gross income) was 37.3%, 34.2% and 35.5% in 1997, 1996 and 1995, respectively.
Management expects all three of these ratios to improve in 1998 from the 1997
levels as the new Rochelle operations become more fully integrated.


PROVISIONS FOR LOSSES

The provision for loan losses was $192,000, $145,000, and $180,000 for 1997,
1996, and 1995, respectively.  In 1997, Beloit and Rochelle 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 compared to net charge-offs
of $65,000 in 1995.  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 .14% in 1997 and .07% in 1995.


The allowance for loan losses as a percent of loans was 1.11% at December 31,
1997 compared to 1.19% and .98% at December 31, 1996 and 1995, respectively.
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 will be adjusted.


INCOME TAXES

The effective income tax rate increased to 35.3% in 1997 from 32.9% in 1996 and
29.0% in 1995.  The most significant reason for the increase in 1997 was due to
the fact that goodwill amortization resulting from the acquisition of Rochelle
is not deductible for tax purposes.  In addition, the Company has invested less
in municipal securities exempt from Federal taxes as yields on taxable
securities have become more favorable.  Because Nevahawk is located in Nevada,
its income is not subject to state income tax.  As a result, as a higher
proportion of  income is earned outside of Nevada, the effective rate
increases.  The income generated by Rochelle 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, 1997 were $202.0 million versus $151.5 million
as of December 31, 1996 for an increase of 33.3%.  Total average assets rose to
$183.1 million for the year ended December 31, 1997 versus $148.7 million in
1996, increasing 23.1%.  Most of the increase in assets was the result of the
acquisition of Rochelle on April 30, 1997.  All comments below are comparing
1997 to 1996, unless otherwise noted.


LOANS
Gross loans increased 38.2% to $137.3 million from $99.2 million.   Rochelle
has most of its lending secured by real estate.  As a result, real estate loans
increased substantially, to $87.4 million at December 31, 1997

                                 10

<PAGE>   11

from $56.8 in 1996. This represents an increase of 53.7%. Consumer installment
loans increased $5.4 million, or 27.7%.  As mentioned above, included in the
purchase of Rochelle was Midland Acceptance Corp.  MAC accounted for one-third
of the consumer loan increase.  The credit card program and the home equity
line of credit experienced  solid growth at Beloit accounting for much of the
other increase.  As of December 31, 1997, real estate loans represented 64.3%
of gross loans, commercial loans were 18.7% and consumer loans were 18.4%.
This compares to 57.8%, 23.4% and 19.9%, respectively, at December 31, 1996.


NON-PERFORMING LOANS

Non-performing loans as a percent of total loans decreased to .77% as of
December 31, 1997 versus 1.15% as of the same date in 1996. During 1997 the
loan department staff made a concerted effort to reduce the amount in
delinquent loans.  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 in the amount of non-performing loans may occur.


SECURITIES

Securities as a percent of total average assets decreased to 21.4% at December
31, 1997 from 27.1% at the prior year end.  The average amount of securities
owned during 1997 was $39.2 million compared to $40.6 million in 1996.  A
significant variance from the year end 1997 level is not anticipated for
1998.  Tax exempt securities continue to make up a small percentage of the
investment portfolio.  As the yield relationship between taxable and
tax-exempt securities changes, new investments will be made in the area
that best meets the objectives of the Company.


DEPOSITS

Total average interest bearing deposits increased 30.2%, to $126.3 million from
$97.0 million in 1996.  This represents an increase as a percentage of average
assets to 69.0% in 1997 from 65.2% in 1996.  Interest bearing demand deposits
increased to $10.8 million as compared to $4.9 million, and were 5.9% of
average assets in 1997 as compared to 3.3% in 1996.  The majority of this
increase was the result of the Rochelle purchase, however, Beloit's club
checking account   programs also experienced good growth.  Average  savings
account balances increased 16.3%.  Average time deposits increased to $80.6
million in 1997 from $62.0 million in 1996, for a 29.1% increase.  Average time
deposits increased to 44.0% of average assets compared to 41.7% in 1996.


Total average noninterest bearing demand deposits increased to $16.5 million in
1997 compared to $13.7 million in 1996.  However, as a percentage of average
assets, average noninterest bearing demand deposits were 9.0% in 1997 versus
9.2% in 1996. The increase in dollar amounts was due to a combination of the
purchase of Rochelle and an increase in business customers at Beloit.  As banks
continue to find it difficult to retain the more traditional type of savings
customers, the focus will be upon building relationships with customers and
offering alternative investment products around the core checking account.
BeloitOs mix of deposits is still undergoing change to that of a traditional
commercial bank which began in 1990.  Thus it is expected that a higher
percentage of the Bank's growth will be seen in demand deposit accounts rather
than in traditional time deposit and savings accounts.  With the purchase of
Rochelle, which had been a thrift institution, the shift to demand deposits may
be slowed for a time.


OTHER BORROWINGS

The dramatic growth in other borrowings that had been experienced in 1995 and
1996 did not continue in 1997.  Average borrowings decreased to $14.7 million
from $15.2 million in 1996.  Average borrowings in 1997 were 8.0% of average
assets compared to 10.2% of average assets in 1996.  Beloit has used other
borrowings to fund specific loan requests by taking advances at the FHLB to
match the term and spread required.  Beloit also utilized advances from the
FHLB to meet some short-term liquidity needs and it also utilized a
staggered-maturity advance to fund some consumer lending in 1995.  The advances
taken for short-term liquidity needs and those used to fund the consumer loans
have been retired as they have matured.  In late 1997 and early 1998,
additional amounts were borrowed from the FHLB to meet liquidity needs of loan
demand that exceeded internal deposit growth at a more favorable rate.


During 1995, the bank entered into depository relationships with four local
governmental agencies.  As a

                                  11

<PAGE>   12

result, excess funds deposited into their accounts are invested into
repurchase agreements ("repos") on a daily basis.  These repo balances
will fluctuate during the year as tax dollars are collected and disbursed.
These relationships are bid on a two-year cycle, although one of the four
is on a three-year cycle.  Two of the relationships that are on a two year
cycle expired at the end of June 1997.  The other one expired at the end
of December 1997.  Beloit retained one of the three accounts that were bid in
1997.  This is expected to result in a reduction in the level of repurchase
agreements in 1998.


ASSET/LIABILITY 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, and a negative  gap is one in which there are more liabilities
than assets maturing or repricing within the same time frame.  Accordingly,
in a negative gap position, the Company's net interest income is likely to
decline during periods of rising interest rates and increase during periods
of declining interest rates.  The opposite is true in the case of a positive
gap position.  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.  This is done by 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. Currently each subsidiary bank maintains their own asset/liability
position.  The consolidated interest rate risk exposure is monitored by the
Company on a quarterly basis.


LIQUIDITY

Liquidity as it relates to the subsidiary banks is a measure of their ability
to fund loans and withdrawals of deposits in a cost-effective manner.  The
subsidiary banks principal sources 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 Beloit, from Nevahawk, to provide additional liquidity, without
incurring a tax liability under present law.  During 1996 and 1997 Nevahawk did
not pay a dividend. A payment in 1998 is not anticipated.


Generally, the liquidity needs of the Company consists of payment of dividends
to its shareholders and a limited amount of expenses.  The sources of funds to
provide this liquidity are income from securities, maturities of securities,
cash balances and dividends from Beloit.  The payment of dividends from
Rochelle is not of concern because application has been made to merge Rochelle
into Beloit.  Certain restrictions are imposed upon banks which could limit
their ability to pay dividends if they did not have net earnings in the future.
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, 1997 increased 5.0% to $23.1
million as compared to $22.0 million as of December 31, 1996.  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.  Equity as a percent of assets, core capital as a
percent of assets, total capital as a percent of risk based assets and leverage
ratio were 12.40%, 10.56%, 18.67% and 11.79%, respectively, at December 31,
1997 compared to 14.54%, 14.37%, 23.47%, and 15.08%, respectively, at December
31, 1996.  The Company significantly exceeds all regulatory requirements
regarding capital as the regulatory requirement for core capital as a percent
of assets is 5.50% and for total capital as a percent of risk based assets is
8.00%.


IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and liabilities
of the banks are monetary in nature.

                                   12

<PAGE>   13

As a result, 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 1995, the Financial Accounting Standards Board (FASB) issued Statement No.
123, Accounting for Stock-Based Compensation.  This statement establishes
financial accounting and reporting standards for such plans including
arrangements by which employees or non-employees receive shares of stock or
other equity instruments or the company incurs liabilities to employees based
on the price of the stock such as stock options.  Under this statement, the
stock or equity instruments issued must be accounted for based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measured.  As an alternative to valuing such
instruments at fair value, the employer can continue to account for these under
the previous method of accounting.  If the previous method of accounting is
chosen in lieu of the fair value method, as the Company has done, the Company
must disclose the effects of the fair value for equity awards granted in fiscal
years beginning after December 31, 1994.


In an effort to simplify the current standards in the United States for
computing earnings per share ("EPS") and make them compatible with
international standards, the FASB issued Statement 128, Earnings Per Share.
Statement 128 applies to entities with publicly held common stock and is
effective for financial statements issued for periods ending after December 15,
1997.  Statement 128 replaces APB Opinion 15, Earnings Per Share.  Opinion 15
required that entities with simple capital structures present a single"earnings
per common share" on the face of the income statement.  Those entities with
complex capital structures had to present both "primary" and "fully diluted"
EPS.  Primary EPS shows the amount of income attributed to each share of common
stock if every common stock equivalent were converted into common stock.  Fully
diluted EPS considers common stock equivalents and all other securities that
could be converted into common stock.  Statement 128 simplifies the computation
of EPS by replacing the presentation of primary EPS with a presentation of
basic EPS.  The Statement requires dual presentation of basic and diluted EPS
by entities with complex capital structures.  Basic EPS includes no dilution
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.  Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted EPS.  Statement 128 has been
adopted for the reporting of earnings in this report.


Year 2000 ISSUES

At each of the Company's subsidiary banks, an individual has been assigned to
assess each of the bank's external systems that could be affected by the
upcoming year 2000 change.  Most of the areas have been assessed.  The
assessments which have not been completed are expected to be done in the first
half of 1998.  The most critical areas of bank operations have software and
hardware upgrades scheduled during 1998 at both subsidiaries in conjunction
with our planned consolidation of operating systems for Beloit and Rochelle.
The cost of these upgrades is expected to be approximately $500,000, most of
which will be for depreciable equipment which requires periodic replacement.
At this time, the assessments do not indicate that there will be a substantial
impact on earnings in 1998 or subsequent years.


ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA



                                       13

<PAGE>   14


                            BLACKHAWK BANCORP, INC.

                                AND SUBSIDIARIES


                         CONSOLIDATED FINANCIAL REPORT


                               December 31, 1997








                                       14

<PAGE>   15




                  BLACKHAWK BANCORP, INC. AND SUBSIDIARIES


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





<TABLE>
<CAPTION>
                                                             Page
                                                             ----
            <S>                                               <C>
            INDEPENDENT AUDITOR'S REPORT ON THE
             FINANCIAL STATEMENTS                             2


            FINANCIAL STATEMENTS

             Consolidated Balance Sheets                      3

             Consolidated Statements of Income                4

             Consolidated Statements of Shareholders' Equity  5

             Consolidated Statements of Cash Flows            6

             Notes to Consolidated Financial Statements       7 - 28
</TABLE>



                                       15


<PAGE>   16

                            INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
Blackhawk Bancorp, Inc. and Subsidiaries
Beloit, Wisconsin


We have audited the accompanying consolidated balance sheets of Blackhawk
Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended December 31, 1997, 1996 and 1995.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.


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


In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Blackhawk Bancorp,
Inc., and Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.


/s/Lindgren, Callihan, Van Osdol & Co., Ltd.





Rockford, Illinois
February 20, 1998




<PAGE>   17


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           December 31, 1997 and 1996



<TABLE>
<CAPTION>
ASSETS                                                                       1997              1996
                                                                  ---------------   ---------------
<S>                                                               <C>               <C>
Cash and cash equivalents                                            $  8,680,369      $  7,966,929
Federal funds sold and other short-term investments                     8,889,224         4,677,596
                                                                  ---------------   ---------------
Securities:
 Held-to-maturity                                                      28,919,711        24,864,640
 Available-for-sale                                                     9,487,614        10,701,911
Loans held for sale                                                     1,023,584           240,400
                                                                  ---------------   ---------------
Loans, net of allowance for loan losses of $1,522,669 in
 1997 and $1,185,672 in 1996                                          135,749,604        98,000,619
Bank premises and equipment, net                                        4,353,060         3,463,491
Accrued interest receivable                                             1,466,700         1,041,756
Deferred tax assets                                                           -0-            51,433
Other intangible assets                                                 1,850,544               -0-
Other assets                                                            1,555,185           475,230
                                                                  ---------------   ---------------
   Total assets                                                      $201,975,595      $151,484,005
                                                                  ===============   ===============
    LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
 Deposits:
  Non-interest bearing                                               $ 19,571,450      $ 23,193,906
  Interest bearing                                                    139,479,005        95,116,941
                                                                  ---------------   ---------------
    Total deposits                                                    159,050,455       118,310,847
                                                                  ---------------   ---------------
 Borrowed funds:
  Short-term borrowings                                                12,231,205         7,405,451
  Long-term borrowings                                                  4,850,000         2,275,456
                                                                  ---------------   ---------------
    Total borrowed funds                                               17,081,205         9,680,907
                                                                  ---------------   ---------------
 Accrued interest payable                                                 891,926           680,226
 Deferred tax liabilities                                                 466,965               -0-
 Other liabilities                                                      1,349,868           782,827
                                                                  ---------------   ---------------
    Total liabilities                                                 178,840,419       129,454,807
                                                                  ---------------   ---------------
SHAREHOLDERS' EQUITY:
 Preferred stock, $.01 par value per share; authorized
  1,000,000 shares; issued, none                                              -0-               -0-

 Common stock, $.01 par value per share; authorized
  10,000,000 shares; issued and outstanding 2,296,414
  in 1997 and 2,285,864 in 1996                                            22,964            22,859
 Additional paid in capital                                             7,001,965         6,960,550
 Employee stock options earned                                            130,803            94,764
 Retained earnings                                                     16,045,371        15,072,129
 Less treasury stock, at cost                                            (104,174)          (84,305)
 Net unrealized gains (losses) on securities available-for-sale            38,247           (11,343)
                                                                  ---------------   ---------------
                                                                       23,135,176        22,054,654
Less:  Deferred compensation related to employee stock
       ownership plan debt guarantee                                          -0-           (25,456)
                                                                  ---------------   ---------------
       Total shareholders' equity                                      23,135,176        22,029,198
                                                                  ---------------   ---------------
       Total liabilities and shareholders' equity                    $201,975,595      $151,484,005
                                                                  ===============   ===============
</TABLE>

See Notes to Consolidated Financial Statements.



                                     - 3 -

<PAGE>   18


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                  Years Ended December 31, 1997, 1996 and 1995






<TABLE>
<CAPTION>
                                                               1997        1996        1995
                                                           -----------  ----------  ----------
<S>                                                        <C>          <C>         <C>
Interest income:
 Interest and fees on loans                                $11,596,917  $8,777,209  $8,327,565

 Interest on securities:
  Taxable                                                    2,432,713   2,122,793   1,895,205
  Exempt from federal income taxes                             151,662     221,105     199,168

 Interest on federal funds sold and other short-term
  investments                                                  126,334     201,741     160,031
                                                           -----------  ----------  ----------
    Total interest income                                   14,307,626  11,322,848  10,581,969
                                                           -----------  ----------  ----------
Interest expense:
 Interest on deposits                                        5,931,156   4,578,120   4,485,677
 Interest on short-term borrowings                             612,193     642,894     379,219
 Interest on long-term borrowings                              177,025     173,090     214,223
                                                           -----------  ----------  ----------
    Total interest expense                                   6,720,374   5,394,104   5,079,119
                                                           -----------  ----------  ----------
    Net interest income                                      7,587,252   5,928,744   5,502,850

Provision for loan losses                                      191,777     145,000     180,000
                                                           -----------  ----------  ----------
    Net interest income after provision for loan losses      7,395,475   5,783,744   5,322,850
                                                           -----------  ----------  ----------
Other operating income:
 Trust department income                                       167,824     121,739      87,826
 Service charges and fees                                      896,627     568,951     467,800
 Loan servicing fees                                            94,812         -0-         -0-
 Realized gains on securities                                      -0-         -0-      17,785
 Gain on sale of loans                                          65,443      75,372      37,996
 Other income                                                  311,596     239,735     166,496
                                                           -----------  ----------  ----------
    Total other operating income                             1,536,302   1,005,797     777,903
                                                           -----------  ----------  ----------
Other operating expenses:
 Salaries and wages                                          2,436,229   1,767,328   1,640,139
 Employee benefits                                             630,597     436,445     357,297
 Occupancy expense, net                                        426,388     309,313     300,160
 Furniture and equipment                                       329,038     349,928     383,072
 Data processing                                               444,659     320,109     299,447
 Federal deposit insurance premiums                             32,121       2,000     127,272
 Professional fees                                             342,257     199,373     207,417
 Advertising and marketing                                     138,610     112,790     118,236
 Amortization of intangible assets                             137,272         -0-         -0-
 Other operating expenses                                      991,506     716,319     595,083
                                                           -----------  ----------  ----------
    Total other operating expenses                           5,908,677   4,213,605   4,028,123
                                                           -----------  ----------  ----------
    Income before income taxes                               3,023,100   2,575,936   2,072,630

Provision for income taxes                                   1,067,521     847,661     600,743
                                                           -----------  ----------  ----------
        Net income                                          $1,955,579  $1,728,275  $1,471,887
                                                           ===========  ==========  ==========
        Earnings per share                                        $.86        $.76        $.65
                                                           ===========  ==========  ==========
        Diluted earnings per share                                $.82        $.73        $.63
                                                           ===========  ==========  ==========
        Dividends per share                                       $.43        $.38        $.30
                                                           ===========  ==========  ==========
</TABLE>

See Notes to Consolidated Financial Statements.



                                     - 4 -


<PAGE>   19


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                        Net Unreal-
                                                                                        ized Gains
                                                                                        (Losses) on
                                           Additional                                   Securities
                                 Common     Paid in      Stock      Retained  Treasury  Available
                                  Stock     Capital      Options    Earnings   Stock    for Sale      Other       Total
                                 -------  -----------  -----------  --------  --------  ----------  ----------  -----------
<S>                              <C>      <C>           <C>         <C>       <C>       <C>         <C>         <C>
BALANCE, DECEMBER 31, 1994       $15,006  $6,791,012     $26,642  $13,421,900           $(159,701)  $(132,599)  $19,962,260
Net income                                                          1,471,887                                     1,471,887
Principal payments on
  ESOP loan                                                                                            53,572        53,572
Cash dividends declared
  on common stock, $.30 per share                                    (676,140)                                     (676,140)
Net change in unrealized
 gains (losses) on securities
 available-for-sale                                                                       196,815                   196,815
Stock split                        7,593                               (7,611)                                          (18)
Compensatory employee
  stock options:
 Recognized                                               33,697                                                     33,697
 Exercised or expired                227     155,358      (8,174)                                                   147,411
                                 -------  ----------     -------   -----------          ---------  ----------   -----------
BALANCE, DECEMBER 31, 1995        22,826   6,946,370      52,165   14,210,036              37,114     (79,027)   21,189,484
Net income                                                          1,728,275                                     1,728,275
Principal payments on
  ESOP loan                                                                                             53,571        53,571
Cash dividends declared
  on common stock, $.38 per share                                    (866,182)                                     (866,182)
Purchase of stock for
  treasury, 7,578 shares at
  $11.13 per share                                                   $(84,305)                                      (84,305)
Net change in unrealized
  gains (losses) on securities
  available-for-sale                                                           (48,457)                             (48,457)
Compensatory employee
  stock options:
  Recognized                                              42,654                                                     42,654
  Exercised or expired                33      14,180         (55)                                                    14,158
                                 -------  ----------     -------   ----------- -------- --------  -----------   -----------
</TABLE>


                                     - 5 -


<PAGE>   20



<TABLE>
<CAPTION>
                                                                                          Net Unreal-
                                                                                          ized Gains
                                                                                          (Losses) on
                                           Additional                                     Securities
                                  Common    Paid in     Stock    Retained     Treasury    Available
                                   Stock    Capital    Options   Earnings       Stock     for Sale    Other       Total
                                  ------  -----------  -------  -----------  -----------  ---------- --------   ----------
<S>                              <C>      <C>         <C>       <C>           <C>         <C>        <C>       <C>
BALANCE, DECEMBER 31, 1996        22,859   6,960,550    94,764   15,072,129     (84,305)   (11,343)  (25,456)   22,029,198
Net income                                                        1,955,579                                      1,955,579
Principal payments on
 ESOP loan                                                                                            25,456        25,456
Cash dividends declared
 on common stock, $.43 per share                                   (982,337)                                      (982,337)
Purchase of stock for
 treasury, 1,700 shares at
 $11.69 per share                                                               (19,869)                           (19,869)
Net change in unrealized
 gains (losses) on securities
 available-for-sale                                                                         49,590                  49,590
Compensatory employee stock
 options:
 Recognized                                             36,039                                                      36,039
 Exercised or expired                105      41,415                                                                41,520
                                 -------  ----------  --------  ------------  ----------  ---------  --------  -----------
BALANCE, DECEMBER 31, 1997       $22,964  $7,001,965  $130,803  $16,045,371   $(104,174)  $ 38,247   $   -0-   $23,135,176
                                 =======  ==========  ========  ===========   =========   ========   ========  ===========
</TABLE>



See Notes to Consolidated Financial Statements.


                                     - 6 -



<PAGE>   21


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years Ended December 31, 1997, 1996 and 1995





<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES                                                          1997          1996           1995
                                                                                   ---------------  --------------------  ------
<S>                                                                                <C>                <C>           <C>     <C>
Net income                                                                              $1,955,579  $ 1,728,275       $1,471,887
Adjustments to reconcile net income to net cash
  provided by operating activities:
 Compensatory employee stock options recognized                                             36,039       42,599           33,697
 Provision for loan losses                                                                 191,777      145,000          180,000
 Provision for depreciation and amortization                                               476,002      333,294          348,424
 Amortization of premiums and accretion of discounts
 on investment securities, net                                                            (112,169)     (79,542)          47,621
 Gain on sale of property and equipment                                                        -0-       (2,655)            -0-
 Realized gains on securities                                                                  -0-          -0-          (17,785)
 Gain on sale of loans                                                                     (65,443)     (75,372)         (37,996)
 Loans originated for sale                                                             (11,371,993)  (5,329,228)      (3,232,399)
 Proceeds from sale of loans                                                            10,654,252    5,164,200        3,270,395
 Change in assets and liabilities:
  (Increase) decrease in accrued interest receivable                                         2,300      175,805          (84,251)
  (Increase) decrease in other assets                                                      565,654     (183,415)         184,735
  Increase in accrued interest and other liabilities                                        34,271      178,910           26,669
                                                                                    ---------------  -----------   --------------
    Net cash provided by operating activities                                            2,366,269    2,097,871        2,190,997
                                                                                   ---------------  -----------   --------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from sale of property and equipment                                                  -0-       11,600              -0-
 Proceeds from maturity of securities held-for-maturity                                 20,722,531   11,814,812        6,800,362
 Proceeds from maturity of securities available-for-sale                                 7,823,919   22,484,382        3,806,860
 Purchase of securities held-to-maturity                                               (21,138,970) (10,872,593)      (6,991,719)
 Purchase of securities available-for-sale                                              (6,242,406) (21,628,410)      (6,758,108)
 Net cash used in acquisition of Rochelle, net of cash acquired of $3,874,884             (443,662)         -0-              -0-
 (Increase) decrease in federal funds sold and other
   short-term investments, net                                                          (4,211,628)   7,057,309       (4,683,512)
 Loans originated, net of principal collected                                           (1,077,529)  (4,597,592)      (5,013,115)
 Purchase of bank premises and equipment                                                  (297,612)     (73,312)      (1,178,618)
                                                                                   ---------------  -----------   --------------
    Net cash provided by (used in) investing activities                                 (4,865,357)   4,196,196      (11,990,037)
                                                                                   ---------------  -----------   --------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase (decrease) in deposits                                                    (3,252,540)  (1,406,082)       4,978,624
 Net increase (decrease) in short-term borrowings                                        4,825,754   (2,274,382)       6,932,833
 Proceeds from long-term borrowings                                                      3,500,000          -0-          850,000
 Payments on long-term borrowings                                                         (900,000)  (1,300,000)             -0-
 Dividends paid                                                                           (982,337)    (866,182)        (676,140)
 Proceeds from issuance of common stock                                                     41,520       14,213          147,393
 Purchase of common stock for treasury                                                     (19,869)     (84,305)             -0-
                                                                                   ---------------  -----------   --------------
    Net cash provided by (used in) financing activities                                  3,212,528   (5,916,738)      12,232,710
                                                                                   ---------------  -----------   --------------
    Increase in cash and cash equivalents                                                  713,440      377,329        2,433,670

Cash and cash equivalents:
 Beginning                                                                               7,966,929    7,589,600        5,155,930
                                                                                   ---------------  -----------   --------------
 Ending                                                                                 $8,680,369  $ 7,966,929       $7,589,600
                                                                                   ===============  ===========   ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash payments for:
  Interest                                                                              $7,264,326  $ 5,407,243       $4,964,373
  Income taxes                                                                            $341,282  $   878,315         $710,876

</TABLE>
                                     - 7 -

<PAGE>   22


                       BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF CASH FLOWS

                     Years Ended December 31, 1997, 1996 and 1995

                                       (CONTINUED)



<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES         1997     1996          1995
                                                        -----------  -----------  ------------
<S>                                                     <C>          <C>          <C>
Other assets acquired in settlement of loans            $   291,980     $225,546      $193,200
Principal payments on ESOP loan                         $    25,456     $ 53,571      $ 53,571
Common stock issued to effect stock split               $       -0-     $    -0-      $  7,593
Purchase of net assets of Rochelle:
Fair value of non cash assets                           $45,594,706
Liabilities assumed                                     $45,451,489
</TABLE>

   See Notes to Consolidated Financial Statements.






<PAGE>   23




                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1997


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 facilities in Beloit,
          Wisconsin 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, 1997 and 1996, 60% ($83,072,441) and 57%
          ($56,817,700), 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. (Company) and its
          wholly-owned subsidiaries, Blackhawk State Bank (Blackhawk) and
          its wholly-owned subsidiaries, Nevahawk Investment, Inc. and
          Rochelle Savings Bank (Rochelle).  All significant intercompany
          transactions and accounts have been eliminated in consolidation.


          On April 30, 1997, the Corporation acquired for cash all of the
          outstanding shares of Rochelle Bancorp, Inc. and its
          wholly-owned subsidiaries. Also, the Corporation acquired 100%
          of the stock of Midland Acceptance Corp., a 50% owned subsidiary
          of Rochelle.  The total acquisition cost was $4,318,546. The
          excess of the total acquisition cost over the fair value of the
          net assets acquired of $1,934,127 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 liquidated into the Corporation.


          The unaudited proforma effect of the transaction had it occurred
          prior to 1996 is as follows:



<TABLE>
<CAPTION>
                                               1997    1996
                                              ------  ------
          <S>                                 <C>     <C>
          Net interest income (in thousands)  $8,156  $7,577
                                              ======  ======
          Net income (in thousands)           $2,036  $1,795
                                              ======  ======
          Earnings per share                  $  .89  $  .79
                                              ======  ======
</TABLE>

     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.


     STATEMENTS OF CASH FLOWS:


          For purposes 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.




                                     - 8 -

<PAGE>   24

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)


 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


      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.


      SECURITIES AVAILABLE-FOR-SALE:


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


      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 contracted 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. Loans held for sale are
             stated at the lower of aggregate cost or market. Real estate
             loans serviced for others are not included in the
             accompanying balance sheets.






                                     - 9 -

<PAGE>   25

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


     MORTGAGE SERVICING RIGHTS:


            In accordance with FASB Statement No. 125 "Accounting for Transfers
            and Servicing of Financial Assets and Extinguishment of
            Liabilities" and FASB Statement No. 122 "Accounting for Mortgage
            Servicing Rights", the Company capitalizes the estimated value of
            mortgage servicing rights. The Company acquires servicing rights
            through the origination and purchase of mortgage loans. Prior to
            the adoption of FASB Statement No's. 125 and 122, only mortgage
            servicing rights that were purchased were capitalized. 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 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.
            Costs of major additions and improvements are capitalized.
            Expenditures for maintenance and repairs are reflected as expense
            when incurred.


     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.  The Bank
            had no other real estate at December 31, 1997 and 1996.


     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:


            The Bank has a defined-contribution plan which covers substantially
            all full-time employees.  Costs of the plan are based on
            participants' eligibility and compensation and are funded as
            accrued.






                                     - 10 -

<PAGE>   26

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


     TRUST ASSETS:


            Assets, other than deposits in Blackhawk, 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 and its 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.


NOTE 2. SECURITIES


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


     HELD-TO-MATURITY SECURITIES:



<TABLE>
<CAPTION>
                                                    1997
                           -----------------------------------------------------
                                           Gross        Gross
                             Amortized  Unrealized    Unrealized
                                Cost       Gains       (Losses)       Fair Value
                           -----------  -----------  ------------  -------------
<S>                        <C>          <C>          <C>           <C>
U.S. Treasury securities   $10,190,719      $97,072      $(1,829)    $10,285,962
U.S. Government agencies    13,899,629       80,993      (12,957)     13,967,665
Obligations of states and
 political subdivisions      4,340,570       23,523       (8,381)      4,355,712
Other securities               488,793                                   488,793
                           -----------  -----------  ------------  -------------
                           $28,919,711     $201,588     $(23,167)    $29,098,132
                           ===========  ===========  ============  =============
<CAPTION>
                                                  1996
                           -----------------------------------------------------
                                           Gross        Gross
                             Amortized  Unrealized    Unrealized
                                Cost       Gains       (Losses)       Fair Value
                           -----------  -----------  ------------  -------------
<S>                        <C>          <C>          <C>           <C>
U.S. Treasury securities   $11,403,001     $135,417     $(26,855)    $11,511,563
U.S. Government agencies     9,341,386       30,546      (46,076)      9,325,856
Obligations of states and
 political subdivisions      3,117,794        4,098      (30,687)      3,091,205
Other securities             1,002,459        7,618                    1,010,077
                           -----------  -----------  ------------  -------------
                           $24,864,640     $177,679    $(103,618)    $24,938,701
                           ===========  ===========  ============  =============
</TABLE>





                                     - 11 -

<PAGE>   27

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 2. SECURITIES (CONTINUED)


     AVAILABLE-FOR-SALE SECURITIES:



<TABLE>
<CAPTION>
                                                  1997
                           -----------------------------------------------------
                                           Gross        Gross
                             Amortized  Unrealized    Unrealized
                                Cost       Gains       (Losses)       Fair Value
                           -----------  -----------  ------------  -------------
<S>                        <C>          <C>          <C>           <C>
U.S. Treasury securities    $1,250,353       $2,226                   $1,252,579
U.S. Government agencies     7,332,738       74,767     $(19,770)      7,387,735
Other securities               847,300                                   847,300
                           -----------  -----------  ------------  -------------
                            $9,430,391      $76,993     $(19,770)     $9,487,614
                           ===========  ===========  ============  =============
<CAPTION>

                                                  1997
                           -----------------------------------------------------
                                           Gross        Gross
                             Amortized  Unrealized    Unrealized
                                Cost       Gains       (Losses)       Fair Value
                           -----------  -----------  ------------  -------------
<S>                        <C>          <C>          <C>           <C>
U.S. Treasury securities    $2,750,977       $6,601                   $2,757,578
U.S. Government agencies     7,256,468       47,500                    7,227,378
Other securities               716,286          669     $(76,590)        716,955
                           -----------  -----------  ------------  -------------
                           $10,723,731      $54,770     $(76,590)    $10,701,911
                           ===========  ===========  ============  =============
</TABLE>

         The amortized cost and fair value of securities as of December 31,
         1997, 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 repaid without
         any penalties.  Therefore, these securities are not included in the
         maturity categories in the following maturity summary:



<TABLE>
<CAPTION>
                                       Held-to-Maturity       Available-for-Sale
                                  ------------------------  ----------------------
                                   Amortized                Amortized
                                     Cost      Fair Value      Cost     Fair Value
                                  -----------  -----------  ----------  ----------
<S>                               <C>          <C>          <C>         <C>
Due in one year or less           $ 9,380,483   $9,395,440  $2,000,635  $2,000,688
Due after one year through five
years                              10,713,554   10,796,231   3,757,088   3,778,323
Due after five years through ten
years                                 826,775      836,539   1,000,910   1,005,313
Mortgage-backed securities          7,998,899    8,069,922   1,824,458   1,855,990
Other securities                                               847,300     847,300
                                  -----------  -----------  ----------  ----------
                                  $28,919,711  $29,098,132  $9,430,391  $9,487,614
                                  ===========  ===========  ==========  ==========
</TABLE>

         The net unrealized gains (losses) on securities available-for-sale as
         of December 31, 1997 and 1996 were $38,247 and $(11,343),
         respectively, which is reflected net of deferred tax (benefits) of
         $18,976 and $(10,477), respectively, in shareholders' equity.


         There were $0, $0, $17,785 and in realized gains or losses on
         securities for 1997, 1996 and 1995, respectively.


         Securities available-for-sale with a carrying value of $6,333,527 and
         $8,663,098 at December 31, 1997 and 1996, respectively, were pledged
         to secure public deposits and for other purposes as required or
         permitted by law.  Securities held-to-maturity with a carrying value
         of $10,740,441 and $5,911,482 at December 31, 1997 and 1996,
         respectively were pledged to secure public deposits and for other
         purposes as required or permitted by law.






                                     - 12 -

<PAGE>   28

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)

NOTE 3. LOANS

     The composition of the loan portfolio is as follows:

<TABLE>
<CAPTION>
                                               1997             1996
                                           ------------    ------------
     <S>                                   <C>             <C>
     Real estate - mortgage                 $83,072,441     $55,475,000
     Real estate - construction               3,955,615       1,342,700
     Consumer                                26,006,036      19,585,915
     Commercial                              26,681,765      23,023,076
                                           ------------    ------------

                                            139,715,851      99,426,691

     Less:  Allowance for loan losses         1,522,669       1,185,672
            Unearned discount                   420,000
                                           ------------    ------------
     Loans, net                            $136,773,188     $98,241,019
                                           ============    ============
</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>
                                                 1997        1996
                                              ----------  ----------
        <S>                                   <C>         <C>
        Impaired loans                        $  325,066    $444,594
        Non-accruing loans                       663,973     442,897
        Past due 90 days or more and still
          accruing                                89,841     252,163
                                              ----------  ----------
        Total nonperforming loans             $1,078,880  $1,139,654
                                              ==========  ==========
</TABLE>

         The average balance of loans classified as impaired totaled
         approximately $405,253 and $601,615 for the years ended December 31,
         1997 and 1996, respectively.  The allowance for loan losses related to
         impaired loans amounted to approximately $115,000 and $180,277 at
         December 31, 1997 and 1996, respectively.  Interest income on impaired
         loans of $2,856 and $51,762 was recognized for cash payments received
         in 1997 and 1996, respectively.


         The Company has $133,417 in commitments to loan additional funds to
         the borrowers of nonperforming loans.






                                     - 13 -

<PAGE>   29

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 3. LOANS (CONTINUED)


     The effect on interest income of the non-accruing loans is as follows:


<TABLE>
<CAPTION>
                                                   1997        1996       1995
                                                ----------  ----------  --------
      <S>                                         <C>         <C>       <C>
      Income recognized                            $30,710     $29,578   $12,952
                                                ==========  ==========  ========
      Income that would have been
         recognized in accordance with the
         original loan terms                       $77,016     $52,194   $22,967
                                                ==========  ==========  ========
      A summary of transactions in the
         allowance for loan losses is as follows:

      Balance at beginning of year              $1,185,672    $928,817  $814,115
      Acquired allowance for loan losses           321,096
                                                ----------  ----------  --------
      Adjusted balance at beginning of year      1,506,768     928,817   814,115
      Provision charged to expense                 191,777     145,000   180,000
      Loans charged off                          (216,176)   (109,486)  (77,042)
      Recoveries                                    40,300     221,341    11,744
                                                ----------  ----------  --------
         Balance at end of year                 $1,522,669  $1,185,672  $928,817
                                                ==========  ==========  ========
</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>
                                                    1997         1996
                                                -----------  -----------
         <S>                                    <C>          <C>
         Balance at beginning of year            $1,909,522     $961,933
         Loans acquired                             167,878          -0-
                                                -----------  -----------
         Adjusted balance at beginning of year    2,077,400      961,933
         New loans                                4,909,239    4,951,115
         Principal repayments                   (4,771,642)  (4,003,526)
                                                -----------  -----------
             Balance at end of year              $2,214,997   $1,909,522
                                                ===========  ===========
</TABLE>

         In addition, the Company has loan commitments to the aforementioned
         related parties of $1,683,261 and $1,253,787 in 1997 and 1996,
         respectively.






                                     - 14 -

<PAGE>   30

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 4. MORTGAGE SERVICING RIGHTS:


         The unpaid principal balance of mortgage loans serviced for others,
         which are not included on the consolidated balance sheets, was
         $55,087,784 at December 31, 1997. Custodial escrow balances maintained
         in connection with loan servicing were approximately $644,495 at
         December 31, 1997.  Management believes that the remaining book value
         of mortgage servicing rights approximates the fair value at December
         31, 1997.


         The carrying value and fair value of capitalized mortgage servicing
         rights consisted of the following:


<TABLE>
<CAPTION>
                                                          1997
                                                        --------
         <S>                                            <C>
         Unamortized cost of mortgage servicing rights  $545,412
         Valuation allowance                                 -0-
                                                        --------
         Carrying value of mortgage servicing rights     545,412
                                                        ========
         Fair value of mortgage servicing rights        $545,412
                                                        ========
</TABLE>

         The following is an analysis of the activity for mortgage servicing
         rights and the related valuation allowance:

<TABLE>
<CAPTION>
                                                       Eight months ended
                                                        December 31, 1997
                                                       ------------------
         <S>                                                <C>
         UNAMORTIZED COST OF MORTGAGE SERVICING RIGHTS
         Balance at beginning of year                           $-0-
         Acquisition of originated mortgage servicing
          rights (Rochelle)                                  226,944
         Fair value of servicing rights acquired in
          purchase of Rochelle                               241,225
         Additions of originated and acquired mortgae
           servicing rights                                  135,366
         Amortization                                       (58,123)
                                                            --------
         Balance at end of year                             $545,412
                                                            ========
         VALUATION ALLOWANCE
         Balance at beginning of year                           $-0-
         Impairment allowance charged to expense                 -0-
                                                            --------
         Balance at end of year                                 $-0-
                                                            ========
</TABLE>

NOTE 5. BANK PREMISES AND EQUIPMENT

     A summary of bank premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                1997        1996
                                             ----------  ----------
     <S>                                     <C>         <C>
     Land and improvements                     $395,254    $294,364
     Buildings and improvements               5,328,522   4,155,979
     Equipment                                2,503,240   1,494,867
     Vehicles                                   192,309     137,903
                                             ----------  ----------
                                              8,419,325   6,083,113
     Less accumulated depreciation            4,066,265   2,619,622
                                             ----------  ----------
        Bank premises and equipment, net     $4,353,060  $3,463,491
                                             ==========  ==========
</TABLE>

         Depreciation charged to operating expense was $335,691, $333,294, and
         $348,424 for the years ended December 31, 1997, 1996 and 1995,
         respectively.


                                     - 15 -
<PAGE>   31

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 6.  DEPOSITS


         The aggregate amount of short-term jumbo CDs, each with a minimum
         denomination of $100,000, was approximately $9,077,861 and $5,094,935
         in 1997 and 1996, respectively.


         At December 31, 1997, the scheduled maturities of CDs are as follows:



<TABLE>
             <S>                  <C>
              1998                 $49,621,412
              1999                  26,282,822
              2000                  10,100,123
              2001                   1,383,760
              2002 and thereafter      260,238
                                   -----------
                                   $87,648,355
                                   ===========
</TABLE>

NOTE 7.  BORROWED FUNDS

         A summary of borrowed funds is as follows:

<TABLE>
<CAPTION>
                                                                                 1997        1996
                                                                             -----------  ----------
              <S>                                                          <C>          <C>
               Secured Advances from Federal Home Loan Bank of Chicago:
                 Fixed rate of 6.19%, due 6/16/97                           $       -0-  $  300,000
                 Fixed rate of 6.74%, due 8/2/97                                    -0-     600,000
                 Fixed rate of 6.26%, due 6/16/98                               400,000     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         -0-
                 Fixed rate of 5.20%, due 12/11/02                            1,500,000         -0-
               Securities sold under an agreement to repurchase              10,256,205   7,405,451
               Federal funds purchased                                        1,975,000         -0-
                                                                            -----------  ----------
                                                                            $17,081,205  $9,655,451
                                                                            ===========  ==========
</TABLE>

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



                                     - 16 -

<PAGE>   32

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 8. EMPLOYEE BENEFIT PLANS

        PENSION PLAN:

        The Blackhawk has a noncontributory, defined contribution
        money-purchase pension plan covering substantially all of its
        employees.  The 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 $103,905, $77,568, and $74,347, for the
        years ended December 31, 1997, 1996 and 1995, respectively.

        EXECUTIVE BONUS PLAN:

        Beginning January 1, 1991, 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 payable under this plan totaled $131,376
        and $115,176 in 1997 and 1996, respectively.

        Bonus compensation expense was $127,223, $159,410, and $112,417 for
        the years 1997, 1996 and 1995, respectively.

        STOCK OPTION PLANS:

        The Company has reserved 240,000 shares of common stock for issuance
        to directors and key employees under incentive stock option and
        purchase 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
                                        1997      Price     1996      Price     1995      Price
                                      -------   --------  -------   --------  -------   --------
         <S>                        <C>        <C>       <C>       <C>       <C>       <C>
         Shares under option,
           beginning of year          275,776  $   7.02   262,235   $   6.72  196,701   $   4.84
         Granted during the year       31,350     11.40    17,300      11.20  108,350       9.40
         Terminated and canceled
           during the year             (1,000)    11.25      (510)      5.85  (11,100)      5.40
         Exercised during the year    (10,550)     3.92    (3,249)      5.25  (31,716)      4.65
                                     --------  --------  --------   --------  -------   --------
         Shares under option, end of
           year                       295,576  $   7.59   275,776   $   7.02  262,235   $   6.72
                                     ========  ========  ========   ========  =======   ========
         Options exercisable, end of
           year                       217,592  $   6.57    84,492   $   5.73  113,543   $   4.97
                                     ========  ========  ========   ========  =======   ========
         Available to grant, end of
           year                        83,000             114,350             131,650
                                     ========            ========             =======
         Weighted average fair value
           of options granted during
           the year                            $   5.74             $   4.58            $   5.66
                                               ========             ========            ========
</TABLE>





                                     - 17 -

<PAGE>   33

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 8. EMPLOYEE BENEFIT PLANS (CONTINUED)


        STOCK OPTION PLANS: (CONTINUED)


        Compensation expense related to granting compensatory employee stock
        options totaled $36,039, $42,599, and $33,697 in 1997, 1996 and 1995,
        respectively.



<TABLE>
<CAPTION>
                         Outstanding Options               Vested Options
                  ------------------------------------  -----------------------
                                Outstanding  Weighted                 Weighted
                   Year of         Shares     Average       Shares    Average
                  Expiration      Granted     Price         Vested     Price
                  ----------    -----------  --------   ------------- ---------
                  <S>         <C>          <C>       <C>   <C>      <C>
                   2000           4,200    $ 3.33          4,200    $ 3.33
                   2001          23,800    $ 3.29         23,800    $ 3.29
                   2002           5,250    $ 4.33          5,250    $ 4.33
                   2003         100,026    $ 5.25        100,026    $ 5.25
                   2004           7,350    $ 6.83          7,350    $ 6.83
                   2005         107,300    $ 9.40         71,433    $ 9.39
                   2006          16,300    $11.20          5,433    $11.20
                   2007          31,350    $11.40            -0-    $  -0-
                              ---------    ------       --------    ------
                                295,576    $ 7.59        217,592    $ 6.57
                              =========    ======       ========    ======
</TABLE>

        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>
                                    1997        1996
                                 ----------  -----------
         <S>                    <C>          <C>
           Net income:
             As reported         $1,955,579   $1,728,275
                                 ==========   ==========
             Pro forma            1,862,286   $1,644,430
                                 ==========   ==========
           Earnings per share:
             As reported:

                Basic            $      .86   $      .73
                                 ==========   ==========
                Diluted          $      .81   $      .69
                                 ==========   ==========
             Pro forma:

                Basic            $      .82   $      .71
                                 ==========   ==========
                Diluted          $      .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>
                                     1997        1996
                                  ----------  ----------
         <S>                      <C>         <C>
         Risk-free interest rate          5%          5%
         Expected life              10 years    10 years
         Expected volatility             29%         33%
         Expected dividend yield          3%          3%
</TABLE>





                                     - 18 -

<PAGE>   34

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 8.  EMPLOYEE BENEFIT PLANS (CONTINUED)

         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 guaranteed 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 $13,393, plus interest each
         quarter and was paid in full at December 31, 1997.

         Cash payments to the Plan during the years ended December 31, 1997,
         1996 and 1995 consisted of the following:



<TABLE>
<CAPTION>
                                         1997        1996        1995
                                      ----------  ----------  ----------
                <S>                   <C>         <C>         <C>
                 Contributions        $ 36,000     $ 33,000     $ 33,250
                 Dividends              38,211       35,751       30,600
                                      --------     --------     --------
                                      $ 74,211     $ 68,751     $ 63,850
                                      ========     ========     ========
</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, 1997, 1996 and 1995 are as follows:



<TABLE>
<CAPTION>
                                       1997        1996        1995
                                    ----------  ----------  ----------
                 <S>                <C>         <C>         <C>
                  Compensation       $  36,000   $  32,545   $  40,763
                  Interest                 -0-       5,022      10,008
                                     ---------   ---------   ---------
                                     $  36,000   $  37,567   $  50,771
                                     =========   =========   =========
</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 has a profit-sharing plan 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. Rochelle made contributions totaling $10,094 during the year
         ended December 31, 1997.




                                     - 19 -

<PAGE>   35

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 8. EMPLOYEE BENEFIT PLANS (CONTINUED)


        DEFERRED COMPENSATION PLAN:


        In addition, Rochelle has 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, 1997 deferred compensation liability
        totaled $269,338.


        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 $1,303,314. These policies have a cash surrender value of
        $556,342 as of December 31, 1997.


NOTE 9. INCOME TAXES


        Net deferred tax (assets) liabilities consist of the following
        components as of December 31, 1997 and 1996:



<TABLE>
<CAPTION>
                                                                    1997           1996
                                                                 ----------    ------------
         <S>                                                    <C>             <C>
         Deferred tax liabilities:
          Property and equipment                                 $  225,578      $171,571
          Unrealized gains on securities available-for-sale          18,976           -0-
          Purchase accounting                                       574,694
          Securities                                                 69,039        41,227
          Mortgage servicing rights                                 127,579           -0-
          Other                                                       6,199           -0-
                                                                 ----------      --------
            Total deferred tax liabilities                        1,022,065       212,798
                                                                 ----------      --------
         Deferred tax assets:
          Allowance for loan losses                                 451,046       228,134
          Unrealized losses on securities available-for-sale            -0-        10,477
          Accrued expenses                                          104,054        25,630
                                                                 ----------      --------
            Total deferred tax assets                               555,100       264,241
                                                                 ----------      --------
            Net deferred tax (assets) liabilities                $  466,965      $(51,443)
                                                                 ==========      ========
</TABLE>





                                     - 20 -

<PAGE>   36

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 9. INCOME TAXES (CONTINUED)

        No valuation allowance was necessary.

        The provision for income taxes charged to operations for the years
        ended December 31, 1997, 1996 and 1995 consists of the following:



<TABLE>
<CAPTION>
                                      1997         1996         1995
                                  ------------  ----------    ----------
        <S>                       <C>           <C>           <C>
         Current:
          Federal                  $  957,385    $778,733      $ 768,641
          State                       128,951      95,127         27,869
                                   ----------    --------      ---------
             Total current          1,086,336     873,860        796,510
                                   ==========    ========      =========

         Deferred:
          Federal                     (12,437)    (15,199)      (195,767)
          State                        (6,378)    (11,000)           -0-
                                   ----------    --------      ---------
             Total deferred           (18,815)    (26,199)      (195,767)
                                   ----------    --------      ---------
              Total                $1,067,521    $847,661      $ 600,743
                                   ==========    ========      =========
</TABLE>

        The income tax provision differs from the amount of income tax
        determined by applying the U.S. federal income tax rate to pretax
        income for the years ended December 31, 1997, 1996 and 1995 due to the
        following:



<TABLE>
<CAPTION>
                                                                   1997        1996        1995
                                                               ------------  ----------   --------
       <S>                                                    <C>            <C>        <C>
        Income taxes at federal statutory rate                  $1,027,854    $875,818    $704,694
        Increase (decrease) in income taxes
         resulting from:
         Tax exempt income                                         (58,917)    (75,175)    (67,717)
         State income taxes, net of federal
           income tax benefit                                       75,552      55,524      24,224
           Amortization of goodwill and other
             intangibles                                            62,354         -0-         -0-
         Excess stock option compensation                          (18,147)     (7,409)    (59,062)
         Other                                                     (20,175)     (1,097)     (1,396)
                                                                ----------    --------    --------
                                                                $1,068,521    $847,661    $600,743
                                                                ==========    ========    ========
</TABLE>

         The Company previously qualified under provisions of the Internal
         Revenue Code which permit as a deduction from taxable income an
         allowance for bad debts which differs from the provision for such
         losses charged to income.  Accordingly, retained earnings at
         December 31, 1997 included approximately $3,952,661, representing
         Blackhawk's federal bad debt deduction in excess of actual losses
         for which no provision for federal income taxes had been made.


NOTE 10. DIVIDEND LIMITATIONS


         Dividend distributions by Blackhawk are limited by state banking
         regulations.  Generally, the regulations provide that dividends are
         limited to current year net income of Blackhawk provided that the
         surplus of Blackhawk exceeds the capital stock.  Accordingly,
         Blackhawk will only be able to pay dividends to the Company derived
         from income earned in 1997 unless prior consent is obtained from the
         Wisconsin Commissioner of Banking.


         Further, Blackhawk may not declare or pay a cash dividend, or
         repurchase any of its stock, if the effect thereof would cause the net
         worth of Blackhawk to be reduced below either the amount required for
         the liquidation account (as detailed in Note 12) or the net worth
         requirements imposed by the Commissioner and the Federal Deposit
         Insurance Corporation (F.D.I.C.).






                                     - 21 -

<PAGE>   37

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 11. 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.

         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, 1997 and 1996 was as
         follows:



<TABLE>
<CAPTION>

                                                 1997          1996
                                                ------         -----
             <S>                             <C>            <C>
              Loan commitments                $20,883,266    $9,327,753
              Standby letters of credit           582,588       355,991
                                              -----------    ----------
                                               21,465,854     9,683,744
              Commitments to sell               1,459,019           -0-
                                              -----------    ----------
                                              $20,006,835    $9,683,744
                                              ===========    ==========
</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 12. LIQUIDATION ACCOUNT


         In May 1990, Blackhawk was converted from a Wisconsin chartered mutual
         savings bank to a Wisconsin chartered capital stock commercial bank
         subsidiary of Blackhawk Bancorp, Inc. (Holding Company).  Pursuant to
         the Plan, shares of capital stock of the Holding Company were offered
         at a predetermined price to eligible account holders and others as
         provided in the Plan.


         Subsequent to the conversion to a stock bank, a Special Liquidation
         Account was established by restructuring a portion of retained
         earnings for the purpose of granting deposit account holders prior to
         the conversion a priority claim if Blackhawk were to liquidate in the
         future.  In the event of such a liquidation (and only in such event),
         such deposit account holders who continue to maintain their deposit
         account shall be entitled to receive a distribution from the
         liquidation account after payment to creditors.  The balance
         attributable to the Special Liquidation Account is decreased by a
         proportionate amount as each deposit account holder closes an account
         or reduces the balance in such deposit account as of any future fiscal
         year end.  The balance of the Special Liquidation Account was
         $2,608,584 on December 31, 1997.






                                     - 22 -

<PAGE>   38

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 13. LEASE COMMITMENTS


         Blackhawk leases two branch office locations in Beloit, Wisconsin
         under leases expiring November 2014 and July 2012, respectively.  The
         leases can be terminated every five years, but Blackhawk 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.
         Because of the early termination costs, management does not intend to
         exercise the termination prior to expiration of the leases.


         Rochelle entered into a lease agreement in December 1997 for branch
         office space in Roscoe, Illinois. The lease requires monthly payments
         of $1,668 until occupancy then $2,604 thereafter subject to
         inflationary adjustments after three years from occupancy. In
         addition, Rochelle is obligated to pay a portion of the real estate
         taxes, insurance, and common area maintenance. It is anticipated
         occupancy will occur March 1998 and the branch will be operational at
         that time.


         The total minimum rental commitment under the leases at December 31,
         1997 is as follows:


             Year ending December 31:




<TABLE>
                        <S>             <C>
                        1998            $   88,938
                        1999                94,517
                        2000               108,350
                        2001               108,350
                        2002 and later   1,131,156
                                        ----------
                                        $1,531,311
                                        ==========
</TABLE>

         Total rent expense for the years ended December 31, 1997, 1996 and
         1995 was $48,659, $35,500, and $32,083, respectively.

NOTE 14. EARNINGS PER SHARE

         In February 1997, the Financial Accounting Standards Board issued
         Statement No. 128 ("SFAS 128"), "Earnings per Share" ("EPS"). SFAS 128
         simplifies the standards for computing EPS previously found in APB
         Opinion No. 15 ("APB 15").  SFAS 128 replaces the presentation of
         "primary" EPS with the presentation of "basic" EPS. It also requires
         dual presentation of basic and diluted EPS on the face of the income
         statement and a reconciliation of the numerator and denominator used
         in the basic EPS calculation to the numerator and denominator used in
         the diluted EPS calculation. Basic EPS excludes dilution and is
         computed by dividing net income by the weighted-average common shares
         outstanding. Diluted EPS reflects the dilution that would occur if
         securities or other contracts to issue common stock were exercised or
         converted to common stock.




                                     - 23 -

<PAGE>   39

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 14. EARNINGS PER SHARE (CONTINUED)




<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997

                                                                        Per
                                            Income          Share      Share
                                         (Numerator)    (Denominator)  Amount
                                         -----------    ------------   ------
<S>                                       <C>             <C>           <C>
Earnings per share:
Net income                                $1,955,579      2,283,428     $0.86
                                          ==========                    =====

Effect of dilutive stock options                            101,160
                                                          ---------
Diluted EPS:

Net income + assumed exercising of
  options                                 $1,955,579      2,384,588     $0.82
                                          ==========      =========     =====
FOR THE YEAR ENDED DECEMBER 31, 1996



<CAPTION>
                                                                        Per
                                          Income            Share      Share
                                       (Numerator)      (Denominator)  Amount
                                    ------------------  -------------  ------
<S>                                       <C>             <C>           <C>
Earnings per share:

Net income                                $1,728,275      2,279,494     $0.76
                                          ==========                    =====

Effect of dilutive stock options                             92,973
                                                          ---------

Diluted EPS:

Net income + assumed exercising of
 options                                    $1,728,275    2,372,467     $0.73
                                            ==========    =========     =====

FOR THE YEAR ENDED DECEMBER 31, 1995


<CAPTION>
                                                                        Per
                                          Income            Share      Share
                                       (Numerator)      (Denominator)  Amount
                                    ------------------  -------------  ------
<S>                                      <C>             <C>         <C>

Earnings per share:

Net income                                $1,471,887      2,273,309    $0.65
                                          ==========                   =====
Effect of dilutive stock options                             57,112
                                                         ----------
Diluted EPS:
Net income + assumed exercising of
  options                                 $1,471,887      2,330,421    $0.63
                                          ==========     ==========    =====
</TABLE>





                                     - 24 -



<PAGE>   40

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 15. MERGER PLAN


         Pursuant to a plan of merger adopted February 1998, Rochelle will be
         merged into Blackhawk, thereby extinguishing all common shares of
         Rochelle. The transaction is anticipated to be accounted for similar
         to a pooling of interests with no goodwill recognized and all assets
         and liabilities of Rochelle being transferred to Blackhawk at their
         book value at the date of consummation of the merger. It is
         anticipated that the merger will be completed in 1998.


NOTE 16. COMMON STOCK SPLIT


         On March 31, 1995, the Company issued the 749,200 additional shares,
         at $.01 per share par value, necessary to effect a 2 for 1 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.


         The dividends per common share and earnings per common share for the
         year ended December 31, 1995 has been retroactively adjusted for these
         splits.


NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS


         FASB Statement No. 107, "Disclosures about Fair Value of Financial
         Instruments", requires disclosure of fair value information about
         financial instruments, whether or not recognized in the balance sheet,
         for which it is practicable to estimate that value.  In cases where
         quoted market prices are not available, fair values are based on
         estimates using present value or other valuation techniques.  Those
         techniques are significantly affected by the assumptions used,
         including the discount rate and estimates of future cash flows.  In
         that regard, the derived fair value estimates cannot be substantiated
         by comparison to independent markets and, in many cases, could not be
         realized in immediate settlement of the instrument.  Statement 107
         excludes certain financial instruments and all nonfinancial
         instruments from its disclosure requirements.  These fair value
         disclosures are not intended to represent the market value of the
         Company.


         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.


         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.






                                    - 25-

<PAGE>   41

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)


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



<TABLE>
<CAPTION>
                                                     December 31, 1997                     December 31, 1996
                                                --------------------------             -------------------------
                                                        Carrying              Fair            Carrying             Fair
                                                         Amount              Value             Amount              Value
                                                      -------------       ----------        -----------            -------
                                                                 (in thousands)                        (in thousands)
          <S>                                         <C>                 <C>                <C>                  <C>
           Financial assets:
             Cash and cash equivalents                   $  8,680          $  8,680            $  7,966            $  7,966
             Federal fund sold and other
                 short-term investments                     8,889             8,889               4,678               4,678
             Securities                                    38,407            38,586              35,567              35,641
             Loans, net of allowance for
                 loan losses                              135,750           136,219              98,241              97,979

           Financial liabilities and other
             off-balance sheet instruments:
                 Demand deposit and savings                71,402            71,402              56,233              56,233
                 Time deposits                             87,648            87,923              62,077              62,367
                 Borrowings                                17,081            17,114               9,681               9,674
             Loan commitments                                 -0-               -0-                 -0-                 -0-
             Standby letters of credit                        -0-                 6                 -0-                   4
</TABLE>

NOTE 18. REGULATORY MATTERS


         The Company, Blackhawk, and Rochelle 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 the
         Company's, Blackhawk's, and Rochelle's financial statements.  Under
         capital adequacy guidelines and regulatory framework for prompt
         corrective action, the Company, Blackhawk, and Rochelle 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, Blackhawk, and Rochelle 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-weighted assets (as defined), and the Tier I capital (as defined)
         to average assets (as defined).  Management believes, as of December
         31, 1997, that the Company, Blackhawk, and Rochelle meets all capital
         adequacy requirements to which it is subject.


         As of December 31, 1997, the most recent notification from the FDIC
         categorized Blackhawk as well capitalized under the regulatory
         framework for prompt corrective action.  To be categorized as well
         capitalized, the Company, Blackhawk, and Rochelle 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 believes have changed the
         Company's, Blackhawk's, and Rochelle's category.






                                     - 26 -

<PAGE>   42

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



NOTE 18. REGULATORY MATTERS (CONTINUED)


         The actual capital amounts and ratios as of December 31, 1997 are also
         presented in the table (in thousand's).



<TABLE>
<CAPTION>
                                                                                       To be Well Capitalized
                                                                                            Under prompt
                                                                 For Capital                 Corrective
                                            Actual             Adequacy Purposes           Action Provisions
                                      -----------------    ---------------------     ----------------------------
                                       Amount    Ratio       Amount      Ratio          Amount        Ratio
                                      ---------  ------    ---------------------     ------------   -----------
        <S>                           <C>      <C>         <C>         <C>            <C>             <C>
         Company
         -------
          Total Capital (To Risk
            Weighted Assets)           $22,895  18.67%      $9,811        8.0%          $12,264        10.0%

          Tier I Capital (To Risk
            Weighted Assets)           $21,373  17.43%      $4,905        4.0%          $ 7,358         6.0%

          Tier I Capital (To
            Average Assets)            $21,373  11.79%      $5,439        3.0%          $ 9,065         5.0%

         Blackhawk
         ---------
          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%

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

  Cash and cash equivalents                    $   135,963     $ 1,326,460

  Investment in subsidiaries                    22,411,007      17,984,004

  Investment securities held-to-maturity           110,051       2,197,449

  Due from subsidiaries, net                       696,731         742,459

  Accrued interest receivable                        1,251          14,165

  Income tax receivable                                -0-          26,009

  Other intangible assets                           88,234             -0-

  Other assets                                         -0-          40,903
                                               -----------     -----------
        Total assets                           $23,443,237     $22,331,449
                                               ===========     ===========
</TABLE>





                                     - 27 -

<PAGE>   43

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)



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


         CONDENSED PARENT COMPANY BALANCE SHEETS: (CONTINUED)



<TABLE>
<CAPTION>
                                                                    1997                        1996
                                                                ------------                ------------
<S>                                                             <C>                         <C>
         LIABILITIES AND SHAREHOLDERS' EQUITY

           Liabilities:
              Other borrowings                                            $      -0-                  $    25,456
              Accrued tax payable                                              18,225                         -0-
              Other liabilities                                               289,836                     276,795
                                                                          -----------                 -----------

                 Total liabilities                                            308,061                     302,251
                                                                          -----------                 -----------
           Shareholders' Equity:
              Preferred stock                                                     -0-                         -0-
              Common stock                                                     22,964                      22,859
              Additional paid in capital                                    7,132,768                   7,055,314
              Retained earnings                                            16,045,371                  15,072,129
              Less treasury stock, at cost                                   (104,174)                    (84,305)
              Net unrealized gains (losses) on securities
                  available-for-sale                                           38,247                     (11,343)
               Less:  Deferred compensation related to
                 employee stock ownership plan debt guarantee                     -0-                     (25,456)
                                                                          -----------                 -----------
                 Total shareholders' equity                                23,135,176                  22,029,198
                                                                          -----------                 -----------
                 Total liabilities and shareholders'
                         equity                                           $23,443,237                 $22,331,449
                                                                          ===========                 ===========

CONDENSED PARENT COMPANY STATEMENTS OF INCOME:

<CAPTION>

                                                                          1997            1996         1995
                                                                        ----------     ----------   ----------
<S>                                                                    <C>             <C>         <C>
Income:
  Dividends from subsidiaries                                           $1,750,000     $1,436,000   $1,200,000
  Interest income                                                           73,552        170,827      127,074
                                                                        ----------     ----------   ----------

       Total income                                                      1,823,552      1,606,827    1,327,074
                                                                        ----------     ----------   ----------

Expenses:
  Professional fees                                                         26,433         32,350       33,885
  Other                                                                     45,361         31,001       21,990
                                                                        ----------     ----------   ----------
       Total expenses                                                       71,794         63,351       55,875
                                                                        ----------     ----------   ----------
Income before income tax benefits and
 equity in undistributed net income of subsidiaries                      1,751,758      1,543,476    1,271,199
Income tax expense (benefits)                                                 (798)        10,084        7,055
                                                                        ----------     ----------   ----------
Income before equity in undistributed
 net income of subsidiaries                                              1,752,556      1,533,392    1,264,144

Equity in undistributed net income of
 subsidiaries                                                              203,023        194,883      207,743
                                                                        ----------     ----------   ----------
</TABLE>




                                     - 28 -

<PAGE>   44

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)

<TABLE>
            <S>                                                               <C>                <C>               <C>
             Net income                                                       $1,955,579         $1,728,275        $1,471,887
                                                                              ==========         ==========        ==========
</TABLE>

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


         CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:

<TABLE>
<CAPTION>
                                                                               1997               1996            1995
                                                                              -------           --------       ----------
        <S>                                                               <C>                <C>             <C>
         CASH FLOWS FROM OPERATING ACTIVITIES
           Net income                                                      $1,955,579         $1,728,275      $1,471,887
           Adjustments to reconcile net income
                to net cash provided by operating
                activities:
           Amortization of intangible assets                                   13,333                -0-             -0-
           Equity in undistributed net income
                of subsidiaries                                              (203,023)          (194,883)       (207,743)
           (Increase) decrease in due from
                subsidiaries                                                   43,998           (170,190)       (572,269)
           Accretion of discounts on invest-
                ment securities, net                                          (35,146)           (46,324)        (14,862)
           (Increase) decrease in accrued
                interest receivable                                            12,914              4,069           1,203
           (Increase) decrease in income tax
                receivable                                                     26,009             36,047          87,379
           Increase in other assets                                               -0-            (40,903)            -0-
           Increase in other liabilities                                       13,041             64,380          40,836
           Increase in income tax payable                                      18,225                -0-             -0-
           Increase (decrease) in due to
                subsidiaries                                                      -0-                -0-        (165,344)
                                                                          -----------        -----------      ----------
                Net cash provided by operating
                    activities                                              1,844,930          1,380,471         641,087
                                                                          -----------        -----------      ----------

  CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of securities                                                 (4,967,456)        (5,334,005)     (2,510,327)
    Proceeds from maturity of securities                                    7,090,000          5,308,975       1,500,000
    Purchase of Rochelle Bancorp, Inc.                                     (4,233,324)               -0-             -0-
                                                                          -----------        -----------      ----------
                Net cash used in investing
                    activities                                             (2,110,780)           (25,030)     (1,010,327)

  CASH FLOWS FROM FINANCING ACTIVITIES
    Dividends paid                                                           (982,337)          (866,182)       (676,140)
    Proceeds from sale of common stock                                         77,559             56,811         181,090
    Purchase of common stock for
         treasury                                                             (19,869)           (84,305)            -0-
                                                                          -----------        -----------      ----------
                Net cash used in financing
                    activities                                               (924,647)           (893,676)      (495,050)
                                                                          -----------        ------------      ---------
                Increase (decrease) in cash and
                    cash equivalents                                        (1,190,497)           461,765       (864,290)

  Cash and cash equivalents:

</TABLE>


                                     - 29 -

<PAGE>   45



                   BLACKHAWK BANCORP, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997
                                  (CONTINUED)


<TABLE>
<S>                                                                          <C>                      <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES
  Beginning                                                                     1,326,460                 864,695        1,728,985
                                                                                =========              ==========       ==========

  Ending                                                                        $ 135,963              $1,326,460       $  864,695
                                                                                =========              ==========       ==========
</TABLE>





















                                    - 30 -
<PAGE>   46


        GUIDE THREE DISCLOSURES


Table 1

ANAYLSIS OF NET INTEREST INCOME-TAX EQUIVALENT BASIS

Years Ended December 31,


<TABLE>
<CAPTION>

Average Balance              Average Rate
Paid
  1997    1996     1995    1997   1996   1995
<S>      <C>     <C>      <C>     <C>   <C>

 35,778   35,510  32,117   6.52%  5.98%  5.90%
  3,394    4,862   4,163   6.33%  6.66%  7.01%
---------------------------------------------
 39,172   40,372  36,280   6.50%  6.06%  6.03%

125,403   95,042  92,020   9.25%  9.23%  9.05%

  2,678    3,957   2,759   5.29%  5.05%  5.76%
  2,103       43      34   4.09%  4.65%  5.88%
---------------------------------------------
169,356  139,414 131,093   8.49%  8.20%  8.14%
---------------------------------------------

 10,786    4,933   4,111   1.40%  1.44%  1.53%
 34,960   30,056  27,920   3.05%   3.05% 2.99%
 80,557   62,005  64,257   5.85%   5.79% 5.58%
---------------------------------------------
126,303   96,994  96,288   4.70%   4.72% 4.66%


 11,651   12,411   7,007   5.25%   5.18% 5.41%
  2,999    2,754   3,444   5.90%   6.28% 6.21%
---------------------------------------------
140,953  112,159 106,739   4.77%   4.81% 4.76%
=============================================
                           3.72%   3.39% 3.39%

                           4.52%   4.33% 4.27%
</TABLE>


<TABLE>
<CAPTION>
                                                     Interest Earned or

                                                 1997      1996        1995
<S>                                            <C>       <C>        <C>
Interest Earning Assets:
  Taxable investment securities                  2,331     2,123      1,895
 Tax-exempt investment securities                  215       324        292
                                               ============================
  Total investments                              2,546     2,447      2,187

  Loans                                         11,597     8,777      8,328
  Federal funds sold
   and short term investments                      142       200        159
  Int. bearing deposits in banks                    86         2          2
                                               ----------------------------
  TOTAL EARNING ASSETS                          11,371    11,426     10,676
                                               ----------------------------
Interest Bearing Liabilities:
Interest bearing demand deposits                   151        71         63
Savings deposits                                 1,065       917        836
  Time deposits                                  4,715     3,590      3,587
                                               ----------------------------

  Total int.  bearing deposits                   5,931     4,578      4,486

 Short-term borrowings                              612       643        379

  Long-term borrowings                              177       173        214
                                               -----------------------------
 TOTAL INT.BEARING LIABILITIES                    6,720     5,394      5,079
                                               =============================
 INTEREST RATE SPREAD
NET INTEREST MARGIN/
NET INTEREST INCOME                               7,651     6,032      5,597
</TABLE>


                                     - 31 -

<PAGE>   47
<TABLE>
<CAPTION>
                                           1997 Compared to 1996                           1996 Compared to 1995
                                            Increase (Decrease)                             Increase (Decrease)
                                                  Due to                                             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                         191         16         1       208         25       200        3      228
     Tax-exempt securities           (16)       (98)        5      (109)       (15)       49       (2)      32
                                     -------------------------------------------------------------------------

     Total                           175        (82)        6        99         11       249        -      260
     Loans                            38      2,783        (2)    2,820        170       273        6      449
     Federal funds sold and
      other short-term investments    10        (65)       (3)      (58)       (20)       69       (8)      41
     Interest bearing deposits
      in other banks                  (0)        96       (11)       84         (0)        1       (0)       0

                                     -------------------------------------------------------------------------
TOTAL EARNING ASSETS                 261      5,516       (12)    5,764        161       592       (3)     750
                                     -------------------------------------------------------------------------

Interest Bearing Liabilities:
     Interest bearing
      demand deposits                 (2)        84        (3)       80         (4)       13        1        8
     Savings deposits                  1        150        (0)      148         16        64        1       81
     Time deposits                    39      1,074        12     1,125        133      (126)      (5)       3
                                     -------------------------------------------------------------------------

     Total interest
      bearing deposits                36      1,308         9     1,353        145       (49)      (4)      92

     Short-term borrowings             9        (39)       (1)      (31)       (16)      292       12      264
Long-term borrowings                 (10)        15        (1)        4          2       (43)      (0)     (41)
                                     -------------------------------------------------------------------------

TOTAL INTEREST BEARING
     LIABILITIES                      35      1,284         8     1,326        132       200      (17)     315
                                     -------------------------------------------------------------------------
NET INTEREST MARGIN                  226      4,232       (20)    4,438         29       392       14      435
                                     =========================================================================
</TABLE>



                                     - 32 -
<PAGE>   48



Table 2

ANALYSIS OF LOAN PORTFOLIO



<TABLE>
<CAPTION>
(in thousands)                        December 31,
                                         1997                   1996                1995
                                            Percent of            Percent of        Percent of
                                  Amount      Total      Amount     Total     Amount       Total
<S>                           <C>          <C>        <C>        <C>        <C>        <C>
Real estate-mortgage              82,046     60.98%      55,475     56.33%    54,819       58.60%
Real estate-construction           3,956      2.89%       1,343      1.36%     2,009        2.15%
Real estate-held-for-sale          1,024      0.75%         240      0.24%        --          --
Consumer                          25,006     18.28%      19,586     19.89%    17,325       18.52%
Commercial                        26,682     18.52%      23,023     23.38%    20,324       21.73%
                               -------------------------------------------------------------------------
Gross loans                      138,716    101.42%      99,427    101.20%    94,477      100.99%

Unearned income                     (420)    (0.31%)         --        --         --        0.00%
Allowance for loan loss           (1,523)    (1.11%)     (1,186)    (1.20%)     (929)      (0.99%)
                               -------------------------------------------------------------------------
Net loans                        136,773    100.00%      98,241    100.00%    93,548      100.00%
                               =========================================================================
</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>
Real estate-mortgage           545       35.78%       540        45.53%         521        45.53%
Real estate-construction        --          --         --           --           --           --
Consumer                       353       23.18%       173        14.59%         181        14.59%
Commercial                     625       41.04%       473        39.88%         227        39.88%
                            -----------------------------------------------------------------------
Total                        1,523      100.00%     1,186       100.00%         929       100.00%
                            =======================================================================
</TABLE>


                                     - 33 -
<PAGE>   49

SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                      December 31,
                                               1997       1996     1995
<S>                                           <C>       <C>     <C>
Allowance for loan losses, beginning          1,186        929     814
Amounts associated with acquisition             321         --      --
Amounts charged-off:
     Real estate-mortgage                       110          0       0
     Consumer                                   104         98      40
     Commercial                                   1         11      37
                                              ------------------------
     Total charge-offs                          215        109      77
                                              ------------------------

Recoveries on amounts previously charged-off:
     Real estate-mortgage                         2          0       0
     Consumer                                    17         40      11
     Commercial                                  20        181       1
                                              ------------------------
     Total recoveries                            39        221      12
                                              ------------------------
     Net charge-offs                            176       (112)     65
Provision charged to expense                    192        145     180
                                              ------------------------
Allowance for loan losses, ending             1,523      1,186     929
                                              ========================

NON-PERFORMING LOANS AT PERIOD END
Impaired loans                                  325        445     134
Non-accrual                                     663        443     206
Past due 90 days or more
     and still accruing                          90        252     238
                                              ------------------------
     Total non-performing loans               1,078      1,140     578
                                              ========================

RATIOS
Allowance for loan loss to
     period-end loans                          1.11%      1.19%   0.98%
Net charge-offs to average loans               0.14%     (0.12%)  0.07%
Recoveries to charge-offs                     18.14%    202.75%  15.58%
Non-performing loans to gross loans            0.77%      1.15%   0.61%

EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized                                34         30      13
Income that would have been recoginzed
     in accordance with the original
     loan terms                                  78         52      23

</TABLE>




                                     - 34 -
<PAGE>   50


Table 3

OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                  Years Ended December 31,
                          1997              1996                 1995
                                  % of                % of               % of
                                Average              Average            Average
(in thousands)          Amount   Assets     Amount   Assets     Amount  Assets
<S>                     <C>      <C>     <C>       <C>        <C>       <C>
Other operating expense   5,909   3.23%    4,214      2.83%      4,028    2.86%
Other operating income    1,536   0.84%    1,006      0.68%        778    0.55%
                        -----------------------------------------------------------
Net other operating exp.  4,373   2.38%    3,208      2.15%      3,250    2.31%
                        -----------------------------------------------------------
</TABLE>

Table 4

Three-Year Comparison of Average Balance Sheets

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                1997                 1996              1995
                                                        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               2,678      1.46%    3,957      2.66%    2,759     1.96%
       Interest bearing deposits
        in banks                                2,103      1.15%       43      0.03%       34     0.02%
       Taxable investment securities
        securities                             35,793     19.55%   35,475     23.85%   32,058    22.80%
       Tax-exempt investment
        securities                              3,394      1.85%    4,862      3.27%    4,163     2.96%
     Loans, net of unearned
        income                                124,008     67.74%   94,034     63.23%   91,141    64.83%
                                            ------------------------------------------------------------
        Total earnings assets                 167,976     91.76%  138,371     93.04%  130,155    92.58%

       Cash and due from banks                  6,426      3.51%    5,196      3.49%    5,128     3.65%
       Bank premisis and equipme                4,305      2.35%    3,463      2.33%    3,762     2.68%
       Other non-earning assets                 4,361      2.38%    1,685      1.13%    1,548     1.10%
                                            ------------------------------------------------------------
       Total non-earning assets                15,092      8.24%   10,344      6.96%   10,438     7.42%
                                            ------------------------------------------------------------
TOTAL ASSETS                                  183,068    100.00%  148,715    100.00%  140,593   100.00%
                                            ============================================================

LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
     Interest bearing demand                   10,786      5.89%    4,933      3.32%    4,111     2.92%
     Savings accounts                          34,960     19.10%   30,056     20.21%   27,920    19.86%
     Time deposits                             80,557     44.00%   62,005     41.69%   64,257    45.70%
</TABLE>

                                     - 35 -
<PAGE>   51

<TABLE>
                              -----------------------------------------------------------------------
<S>                           <C>        <C>         <C>          <C>         <C>         <C>
Total interest bearing
 deposits                      126,303      68.99%       96,994       65.22%      96,288       68.49%

Short-term borrowings           11,651       6.36%       12,411        8.35%       7,007        4.98%
Long-term borrowings             2,999       1.64%        2,754        1.85%       3,444        2.45%
                              -----------------------------------------------------------------------

 Total interest bearing
   liabilities                 140,953      76.99%      112,159       75.42%     106,739       75.92%

Non-interest bearing
 deposits                       16,510       9.02%       13,725        9.23%      11,908        8.47%
Other liabilities                2,902       1.59%          957        0.64%       1,008        0.77%
                              -----------------------------------------------------------------------
 Total liabilities             160,365      87.60%      126,841       85.29%     119,735       85.16%

Stockholders' Equity/
 Capital                        22,703      12.40%       21,874       14.71%      20,858       14.84%
                              -----------------------------------------------------------------------
TOTAL LIABILITIES AND
     STOCKHOLDERS EQUITY       183,068     100.00%      148,715      100.00%     140,593      100.00%
                              =======================================================================
</TABLE>


                                     - 36 -
<PAGE>   52


Table 5
INVESTMENT SECURITIES


<TABLE>
<CAPTION>
                      December 31,
                          1997        1996      1995
<S>                    <C>         <C>        <C>
Held-to-Maturity
US Treasury              10,191      11,403    15,399
US Government Agency     13,900       9,341     6,393
Tax-exempt obligations    4,341       3,118     3,902
Other securities            488       1,003       100
                       ------------------------------
Total carrying  value    28,920      24,865    25,794
                       ------------------------------
Total market value       29,098      24,939    26,101

Available-for-Sale
US Treasury               1,252       2,758     4,777
US Government Agency      7,389       6,727     5,900
Tax-exempt obligations       --          --       109
Other securities            847       1,217       786
                       ------------------------------
Total market value        9,488      10,702    11,572
                       ------------------------------
Total Securities         38,408      35,567    37,366
                       ==============================

</TABLE>




                                     - 37 -
<PAGE>   53


Table 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1997

<TABLE>
<CAPTION>
                           Within           After One but     After Five but
                             One             Within Five        Within Ten       After Ten       No Fixed
                            Year                Years              Years           Years         Maturity          Total
                      Amount    Yield     Amount    Yield    Amount    Yield  Amount   Yield   Amount   Yield     Amount     Yield
<S>                  <C>       <C>      <C>       <C>      <C>      <C>      <C>     <C>       <C>     <C>      <C>       <C>
Held-to-Maturity
US Treasury            4,974     5.88%     5,217     6.91%     --       --%      --      --%      --      --%     10,191      6.41%
US Government Agency   2,998     5.68%     2,903     5.93%     --       --%   7,999    7.17%      --      --%     13,900      6.59%
Tax-exempt obligations   920     4.42%     2,594     4.48%    827     4.56%      --      --%      --      --%      4,341      4.48%
Other securities         488     5.61%        --       --%     --       --%      --      --%      --      --%        488      5.61%
                     ---------------------------------------------------------------------------------------------------------------
Total                  9,380     5.66%    10,714     6.06%    827     4.56%   7,999    7.17%      --      --%     28,920      6.19%
                     ---------------------------------------------------------------------------------------------------------------

Available-for-Sale
US Treasury            1,002     5.95%       250     5.98%     --       --%      --      --%      --      --%      1,252      5.96%
US Government Agency     999     5.70%     3,528     6.12%  1,005     6.31%   1,857    6.98%      --      --%      7,389      6.27%
Tax-exempt obligations    --       --%        --       --%     --       --%      --      --%      --      --%         --        --%
Other securities          --       --%        --       --%     --       --%      --      --%     847    6.99%        847      6.99%
                     ---------------------------------------------------------------------------------------------------------------
Total                  2,001     5.83%     3,778     6.11%  1,005     6.31%   1,857    6.98%     847    6.99%      9,488      6.29%
                     ---------------------------------------------------------------------------------------------------------------
Grand Total           11,381     5.69%    14,492     6.07%  1,832     5.52%   9,856    7.13%     847    6.99%     38,408      6.22%
                     ===============================================================================================================

</TABLE>


Table 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31, 1996

<TABLE>
<CAPTION>
                                                                                           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            35,092         40,435         6,521         82,046       46,956        --
Real estate-held-for-sale        1,024             --            --          1,024           --        --
Real estate-construction         3,956             --            --          3,956           --        --
Consumer                         9,713         15,191           102         25,006       15,293        --
Commercial                      16,682          9,271           729         26,682       10,000        --
                             -----------------------------------------------------------------------------
Gross Loans                     65,443         64,897         7,352        138,716       72,250        --
                             =============================================================================
</TABLE>


Table 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
(in thousands)

<TABLE>
<CAPTION>
               Years Ended December 31,
       1997                             1996                               1995
     Average  Percent of Average  Average  Percent of Average  Average  Percent of Average
<S>                               <C>                          <C>
</TABLE>



                                     - 38 -
<PAGE>   54
<TABLE>
<CAPTION>
                             Balance       Total      Rate     Balance        Total     Rate     Balance      Total     Rate
<S>                         <C>         <C>        <C>       <C>         <C>         <C>       <C>         <C>        <C>
Non-interest bearing demand
     deposits                 16,510      11.56%       --       13,725       12.40%       --      11,908      11.01%      --
Interest bearing demand
     deposits                 10,786       7.55%     1.40%       4,933        4.46%     1.44%      4,111       3.80%    1.53%
Savings deposits              34,960      24.48%     3.05%      30,056       27.15%     3.05%     27,920      25.81%    2.99%
Time deposits                 80,557      56.41%     5.85%      62,005       56.00%     5.79%     64,257      59.39%    5.58%
                            --------------------------------------------------------------------------------------------------
Total                        142,813     100.00%     4.70%     110,719      100.00%     4.72%    108,196     100.00%    4.66%
                            ==================================================================================================
</TABLE>

Table 9
MATURITY OF TIME DEPOSITS
December 31, 1997                              Time Remaining to Maturity

<TABLE>
<CAPTION>
                              Due Within  Four to         Seven to      After
                            Three Months Six Months    Twelve Months Twelve Months    Total
<S>                           <C>        <C>           <C>         <C>            <C>
Certifiicates of Deposit
     Less than $100,000         15,442     12,628        16,118       34,384        78,572
     More than $100,000          1,783      1,465         2,185        3,645         9,078
                              -------------------------------------------------------------
Total                           17,225     14,093        18,303       38,029        87,650
                              =============================================================
</TABLE>


<TABLE>
<CAPTION>
Table 10
     Short-term Borrowings                       1997        1996        1995
<S>                                             <C>       <C>        <C>
     Balance outstanding December 31,
     Repurchase agreements                      10,256       7,405      9,680
     Fed funds purchased                         1,975          --         --
                                                -----------------------------
                                                12,231       7,405      9,680
                                                =============================

     Weighted rate December 31,
     Repurchase agreements                        5.28%       5.01%      4.95%
     Fed funds purchased                          5.96%         --%        --%
                                                -----------------------------
                                                  5.39%       5.01%      4.95%
                                                =============================

     Maximum month-end outstanding balance
     Repurchase agreements                      17,038      17,202     11,055
     Fed funds purchased                         4,150       6,000      5,100

     Year-to-date average amount outstanding
     Repurchase agreements                       1,087      11,970      6,140
     Fed funds purchased                        10,564         441        867
                                                -----------------------------
                                                11,651      12,411      7,007
</TABLE>


                                    - 39 -
<PAGE>   55
<TABLE>
<S>                                     <C>        <C>     <C>
     Year-to-date average weighted rate
     Repurchase agreements                 5.25%   5.16%   5.31%
     Fed funds purchased                   5.25%   5.71%   6.11%
                                        -----------------------
                                           5.25%   5.18%   5.41%
                                        =======================
</TABLE>

Table 11
Interest Rate Risk Exposure

<TABLE>
<CAPTION>
                                             Two-           Four-        Seven-         Ten-       Over
December 31, 1997               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        8,889           --             --            --           --          --          8,889
Interest bearing deposits      1,418           --             --            --           --          --          1,418
Taxable investment securities  2,747          500          3,491         3,084        1,486      22,759         34,067
Tax-exempt investment
 securities                       --           --            695            --          225        3,420         4,340
Loans                         18,901        8,424         12,837        13,215       12,066       72,250       137,693
                              ------------------------------------------------------------------------------------------
Total interest-earning assets 31,955        8,924         17,023        16,299       13,777       98,429       186,407
                              ------------------------------------------------------------------------------------------

Interest bearing demand depos 10,380           --             --            --           --           --        10,380

Savings deposits              41,533           --             --            --           --           --        41,533

Time deposits                  5,547       11,678         14,093         9,187        9,116       38,029        87,650

Repurchase agreements         11,724          507             --            --           --           --        12,231

Long-term borrowings              --           --            400            --           --        4,450         4,850

                              ------------------------------------------------------------------------------------------
Total interest-bearing liabil 69,184       12,185         14,493         9,187         9,116      42,479       156,644
                              ------------------------------------------------------------------------------------------

Net gap                      (37,229)      (3,261)         2,530         7,112         4,661      55,950        29,763

Cummualtive Gap              (37,229)     (40,490)       (37,960)      (30,848)      (26,187)     29,763

% of total assets             (18.43%)     (20.05%)       (18.79%)      (15.27%)      (12.97%)     14.74%

</TABLE>



                                     - 40 -
<PAGE>   56


Table 12
<TABLE>
<CAPTION>
     Capital Ratios
                                              1997    1996   Regulatory
                                              Ratio   Ratio  Requirement
<S>                                           <C>     <C>    <C>
     Equity as a percent of assets            12.40%  14.54%   N/A
     Core capital as a percent of assets      10.56%  14.37%  5.50%
     Core capital as a percent of risk based  17.43%  22.27%  4.00%
     Total capital as a percent of risk base  18.67%  23.47%  8.00%
     Leverage ratio                           11.79%  15.08%  3.00%

</TABLE>

Table 13
<TABLE>
<CAPTION>
     Selected Financial Ratios

                                        1997    1996    1995    1994    1993
<S>                                   <C>     <C>     <C>     <C>     <C>
     Return on average assets           1.07%   1.16%   1.05%   0.70%   1.25%
     Return on equity                   8.61%   7.85%   7.06%   4.63%   8.24%
     Average equity to average assets  12.40%  14.54%  13.62%  14.10%  15.15%
     Dividend payout ratio             50.00%  50.67%  46.88%  65.57%  28.04%
     Interest rate spread               3.72%   3.39%   3.39%   3.38%   3.79%
     Net interest margin                4.52%   4.33%   4.27%   4.19%   4.58%
     Other operating expense to assets  2.38%   2.15%   2.86%   3.15%   2.70%
     Efficiency ratio                  64.76   60.76%  64.13%  73.67%  58.38%
     Allowance for loan losses to
      total loans at end of period      1.11%   1.19%   0.98%   0.91%   1.08%

</TABLE>


Table 14
Quarterly Financial Information

<TABLE>
<CAPTION>
                                    1997                                       1996
                          Fourth     Third     Second      First     Fourth    Third    Second    First
<S>                    <C>        <C>        <C>        <C>       <C>       <C>       <C>      <C>
Interest income            3,887     3,858      3,651      2,911     2,867     2,849     2,839     2,768
Interest expense           1,801     1,818      1,738      1,363     1,314     1,342     1,375     1,363
                       ---------------------------------------------------------------------------------
Net interest income        2,086     2,040      1,913      1,548     1,553     1,507     1,464     1,405
Provision for
     loan loss                64        54         44         30        25        35        40        45
Other income                 425       460        407        244       267       249       255       235
Other expense              1,679     1,688      1,474      1,067     1,070     1,060     1,040     1,044
                       ---------------------------------------------------------------------------------
Income before income
     tax                     768       758        802        695       725       661       639       551
Applicable income
     taxes                   275       263        286        243       238       221       210       179
                       ---------------------------------------------------------------------------------
Net income                   493       495        516        452       487       440       429       372
                       =================================================================================
Per share data
Basic Earnings              0.22      0.22       0.23       0.20      0.21      0.19      0.19      0.16
     Dividends              0.11      0.11       0.11       0.10      0.10      0.10      0.10      0.08
     Stock price ranges
     -hi                   15.70     13.25      12.00      13.50     13.50     11.50     11.75     12.00
     -low                  13.00     12.00      11.00      11.00     10.88     10.50     10.50     10.75
Book value
     per share             10.12      9.99       9.89       9.76      9.64      9.50      9.39      9.35
</TABLE>



                                     - 41 -
<PAGE>   57

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 13, 1998
     is incorporated herein by this reference.


(b)  Executive officers of the Registrant.  The information presented in Item
     1 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 13, 1998 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 13, 1998 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 13, 1998 is 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 1997.




                                     - 42 -

<PAGE>   58




                                   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, 1998.
                                                         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         .



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

Principal Financial Officer, Accounting
Officer and Director:
                                /s/ Jesse L. Calkins
                                -------------------- Director,,
                                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 D.D.S.                /s/ Fred Klett
--------------------------                ---------------------
   Dr. H. Daniel Green                       Fred Klett

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

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






                                     - 43 -

<PAGE>   59


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:

                     Annual
                  Report  Pages

Report of Independent Public Accountants.............................16
Consolidated Balance Sheets - December 31, 1997
and 1996.............................................................17

Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.....................................18

Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995..................19-20

Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995............................21-22

Notes to the Consolidated Financial Statements..................  23-45









                                     - 44 -

<PAGE>   60
                            Blackhawk Bancorp, Inc.
                                Exhibit Index To
                       1996 Annual Report on Form 10-KSB

<TABLE>
<CAPTION>
                                                                                        Filed
Exhibit                                         Incorporated Herein                     Here-
Number          Description                     By Reference To:                        with               Page   No.
------          -----------                     -------------------                     ----               ----------
<S>             <C>                             <C>                                  <C>                   <C>
3.1             Amended and Restated            Exhibit 3.1 to                           X
                Articles of Incorporation of    Amendment No. 1 to
                Blackhawk Bancorp, Inc.         Registration Statement on Form
                                                S-1 (Reg. No. 33.32351)

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

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

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

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

10.2            Written description of Plan     Proxy Statement for its Annual
                for Life Insurance of           Meeting of Stockholders, on
                Blackhawk State Bank            May 8, 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
                Bancorp, Inc. Employee          10-KSB, dated March 29,
                Stock Ownership Plan            1995

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


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<PAGE>   61
<TABLE>
<CAPTION>                                                                               Filed
                                                Incorporated Herein                     Here-
Exhibit Number  Description                      By Reference To:                       with       Page No.
--------------  -----------                     --------------------                    -------------------
<S>             <C>                              <C>                                    <C>         <C>
10.5            Blackhawk Bancorp, Inc.          Exhibit 10.5 to
                Directors' Stock Option Plan     Amendment No. 1 to
                                                 Registration Statement Form S-1
                                                 (No. 33-32351)

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

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

10.71           Form of Severance Payment
                Agreement entered into
                between Blackhawk State Bank
                and Mr. Conerton

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

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

13              1997 Annual Report To            Proxy Statement for its Annual Meeting
                Stockholders                     of Stockholders on May 13, 1998, dated
                                                 April 2, 1998

22              Subsidiaries of Registrant

23              Proxy Statement for its          Proxy Statement for
                Annual Meeting of                its Annual Meeting
                Stockholders on May 13, 1998     of Stockholders on
                                                 May 13, 1998, dated
                                                 April 2, 1998
</TABLE>



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