<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, 1999
                                       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.
                               ---

As of March 21, 2000, 2,322,899 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 21, 2000) 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 $16,219,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference in the
respective parts hereof indicated:

1. Proxy Statement and Annual Meeting of Stockholders, on May 17, 2000, dated
   April 7, 2000.

                          Index of Exhibits on Page 27.



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                             BLACKHAWK BANCORP, INC.

                         FORM 10-KSB - TABLE OF CONTENTS
<TABLE>
<CAPTION>


<S>      <C>                                                                                   <C>
PART I                                                                                         PAGE

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

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

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

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

PART II

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

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

Item  7  Financial Statements and Supplemental Data..........................................  14

Item  8  Changes in and Disagreements with
         Accountants on Accounting and Financial
         Disclosure..........................................................................  23

PART III

Item  9  Directors and Executive Officers of the
         Registrant..........................................................................  23

Item  10 Executive Compensation..............................................................  23

Item  11 Security Ownership Of Certain Beneficial
         Owners and Management...............................................................  23

Item  12 Certain Relationships and Related
         Transactions........................................................................  23

PART IV

Item  13 Exhibits, Financial Statement Schedules, and
         Reports on Form 8-K.................................................................  23

Signatures...................................................................................  24
</TABLE>


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                                     PART I

ITEM 1 BUSINESS

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

The Bank is a Wisconsin-chartered commercial bank operating five branches in the
Greater Beloit Area, three free-standing branches and two in-store branches. Six
additional free-standing branches are in the following cities in Illinois:
Belvidere (2), Oregon (1), Rochelle (1), Rockford (1) and Roscoe (1). The Bank
has three wholly-owned subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is
an investment subsidiary located in Las Vegas, Nevada. RSL, Inc., a second
subsidiary whose activities include the sale of mutual funds and annuities, and
in turn owns Midland Acceptance Corporation ("MAC"), a consumer finance company
that maintained offices in Rochelle and Rockford, Illinois until December 1999.
First Financial Services, Inc. ("FFSI"), the third subsidiary, sells, on an
agency basis, mortgage-related insurance products and a variety annuity
products.

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

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a consumer finance subsidiary
whose loan portfolio was sold in December 1999.

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

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

LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the real
estate securing the mortgage loans is located within thirty minutes of the
Bank's offices. Previously, management of the Company has restructured the loan
portfolio of the Greater Beloit Area Bank to decrease the concentration of
mortgage loans and increase commercial and installment loans. Management of the
Company anticipates the on-going restructuring of the loan portfolio of the
acquired institutions. The Analysis of Loan Portfolio, Table 2 of Item 7, shows
the changes in the types of loans from 1997 through 1999.

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

Approximately $130 million in single one-to-four family loans are serviced for
others. These were acquired through the purchase transactions mentioned above.
Substantially all of these loans are 100% sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). MAC is a sub-prime lender, and maintained
approximately $2.0 million in outstanding loans until the sale of the portfolio
in December 1999.


                                       3
<PAGE>   4


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

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. Generally, the recently purchased taxable securities held by the
Company, the Bank and Nevahawk are classified as available-for-sale, while
exempt securities have been classified as held-to-maturity.

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. In March 1999, an additional $7.0 million in cash was transferred
to Nevahawk. Currently, the portfolio under management by Nevahawk is
approximately $36.0 million.

The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above. At December 31, 1999, the Company had no
security holdings.

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
aggregate balance of accounts with balances in excess of $100,000 was $27.3
million at December 31, 1999. During 1999 the Bank acquired approximately $6.4
million in brokered deposits which mature in 2000. The Bank attracts deposits by
offering competitive interest rates for interest-bearing accounts and prices
services on a competitive basis for non-interest bearing accounts.

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

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

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

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

EMPLOYMENT. As of December 31, 1999, the Company and the Bank had 164 employees,
of which 114 were employed on a full time basis. The fringe benefits generally
provided to qualified employees include health insurance, long-term disability
insurance, group term life insurance, a flexible compensation plan (cafeteria
plan), a 401k deferred compensation and profit-sharing plan. Management
considers its relations with employees to be excellent.


                                       4
<PAGE>   5

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

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

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

Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company also acquired the outstanding stock of MAC, which is a
finance company, and as such is an activity closely related to banking
activities.

The FRB has adopted capital guidelines as to both minimum levels of core capital
and risk-based capital. The minimum core capital requirement ranges from 3% to
5% of total assets depending upon the regulator's determination of the holding
company's strength. The guidelines assign risk weightings to assets and
off-balance sheet items, and have minimum risk-based capital ratios. All bank
holding companies are required to have total consolidated capital of 8% of
risk-weighted assets. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the allowance for loan losses. Table
12, filed elsewhere in this report, reflects various regulatory measures of
capital as of December 31, 1999. The Company's core and risk-based capital
ratios, as shown in the table are well above the minimum levels.

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

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

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


                                        5
<PAGE>   6

manner which is unsafe, unsound or contrary to the depositors' interests or been
negligent in the performance of their duties.

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

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

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

Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay dividends
in 2000. This status will be reviewed by Nevahawk at its regular board meetings.

FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $100,000 per insured depositor. The FDIC imposes an annual assessment
on deposits. Effective January 1, 1993, premiums are assessed on the basis of a
risk rating assigned by the FDIC. Since that time the Bank's premium has been at
the lowest available rate. Beginning in 1997, financial institutions insured by
the FDIC were required to contribute to the FICO bond refinancing. This is
expected to occur through the year 2003. Beginning January 1, 2000, the Bank's
Bank Insurance Fund ("BIF") and Saving Association Insurance Fund ("SAIF") Oaker
deposits will be assessed at the same rate.

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

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

OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party transactions,
management interlocks, community reinvestment, truth-in-lending, electronic
funds transfers, truth-in-savings, privacy, and equal credit opportunity.


                                       6
<PAGE>   7

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 anticipated.

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

EXECUTIVE OFFICERS

        NAME AND AGE                 PRINCIPAL OCCUPATION

        Dennis M. Conerton, 49       President and Chief Executive
                                     Officer of the Company and
                                     of the Bank. Prior thereto,
                                     Vice President-Controller,
                                     Regal-Beloit Corporation.

        James P. Kelley, 56          Executive Vice President and
                                     Secretary of the Company
                                     and Executive Vice President of
                                     the Bank and the Bank's
                                     predecessor, Beloit Savings Bank.



                                       7

<PAGE>   8


     Jesse L. Calkins, 59   Senior Vice President, Treasurer and Chief Financial
                            Officer of the Company and Senior Vice President and
                            Senior Trust Officer of the Bank, and the Bank's
                            predecessor, Beloit Savings Bank.

     Richard J. Rusch, 55   Vice President Commercial Lending of the Bank
                            since August 1990. Prior thereto, Vice President
                            Commercial Loans, M & I Bank of Beloit.

     David A. Stearns, 53   Senior Vice President of the Bank
                            (October 1998 to Present); President
                            and Chief Executive Officer of the
                            Castle Bank Harvard, N.A., Harvard, IL
                            (1995 - 1997); President and Chief
                            Executive Officer of the Harris Bank
                            Woodstock, Woodstock, IL (1992 - 1995).

ITEM 2.  PROPERTIES

On December 31, 1999, the Company had eleven locations, of which three 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 Financial
Statements included under Item 7 of this document for further information on
properties.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1999.


                                     PART II

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

As of March 21, 2000 there were 368 Registered Stockholders. Information in
response to this item, along with a table listing the declaration of dividends
is found on page 15 of the Company's Annual Report, and is incorporated herein
by reference.

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

The following discussion provides additional analysis of the Company's financial
statements presented in its annual report and should be read in conjunction with
this information. This discussion focuses on the significant factors which
affected the Company's earnings in 1999, with comparisons to 1998 and 1997,
where applicable. As of December 31, 1999, Blackhawk State Bank ("the Bank") was
the only direct subsidiary of the Company and its operations contribute nearly
all of the revenue and the majority of the consolidated expenses for the year.
The Bank has three wholly owned subsidiaries. Nevahawk Investments, Inc.
("Nevahawk") is an investment subsidiary located in Nevada. RSL, Inc. operates
mutual fund and annuity activities, and in turn owns Midland Acceptance Corp.
("MAC"), a consumer finance company that operated offices in Rochelle and
Rockford, IL. First Financial Services of Belvidere, Inc. ("FFSI") administers
and sells, on an agency basis, mortgage-related insurance products and a variety
of insurance and annuity products.



                                       8
<PAGE>   9

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

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a consumer finance subsidiary.
Midland operated as a consumer finance subsidiary through December, 1999 when
the outstanding loan portfolio was sold.

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

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

NET INTEREST INCOME
Net interest income ("Interest Margin") is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of income amounts and
rates are on a tax-equivalent basis, which accounts for income earned on loans
and securities that are not fully subject to income taxes as if they were fully
subject to income taxes. Interest Margin in 1999 was $9.6 million, increasing
7.3% over the 1998 level of $8.9 million. Interest margin as a percent of
average earning assets ("Interest margin rate") was 3.64% in 1999, 4.24% in 1998
and 4.52% in 1997. The decrease between 1999 and 1998 is the result of the lower
yields on earning assets. A significant contributing factor to the decline in
yield was the addition of a full year of the Belvidere operation, which had a
lower interest margin rate than the Company upon its acquisition.

Interest income and fees on loans is the largest component of interest income
and was the largest factor in the 16.1% increase in interest income during 1999.
The inclusion of the Belvidere portfolio for 12 months versus four months in
1998 largely drove this increase. Internal portfolio loan growth did net an 8.0%
increase from December 31, 1998 to December 31, 1999. The yield earned on loans
decreased to 8.74% in 1999 compared to 9.10% in 1998. The Belvidere portfolio
carried a lower average yield than the balance of the Company's loan portfolio.
Additionally, yields on new loans added in the first half of 1999 were typically
lower than the existing portfolio due to prevailing market interest rates.

Interest income and fees on loans increased 21.4% and was the largest factor in
the increase of interest margin in 1998 compared to 1997. Each loan category had
an increase in average balances as compared to 1997, the result of the
acquisition of Belvidere on September 3, 1998. The yield earned on loans
decreased to 9.10% in 1998 compared to 9.25% in 1997. Loan yields were adversely
affected in 1998 by the decrease in overall market rates and the addition of the
Belvidere loans for four months, which were predominantly one-to-four-family
mortgage loans earning lower yields.

Investment income increased 36.1%, to $3.9 million in 1999 compared to $2.9
million in 1998. Average balances for both taxable and exempt securities were
higher in 1999 when compared to 1998 as short-term investment balances were
redeployed in March and April of 1999 to improve overall asset yield. Yields on
taxable and exempt securities declined to 5.93% and 5.91%, respectively, in 1999
from 6.31% and 6.53%, respectively, in 1998 as new investments carried lower
yields than the existing portfolio. In addition to scheduled maturities, certain
higher-yielding investments were also subject to, and were, called by their
issuers in 1999 further contributing to the overall portfolio yield decline. The
deployment of short-term funds in March and April served to reduce the overall
securities portfolio yield while increasing the yield on those particular funds
that had been invested in short-term money market instruments. The Company
continued through the early part of 1999 to reinvest maturities into tax exempt
securities to take advantage of favorable spreads in such securities.


                                       9
<PAGE>   10

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

Total interest expense was $10.7 million in 1999, increasing 25.4% from $8.5
million in 1998. A 29.6% increase in average interest-bearing liability balances
more than offset a 15-basis point drop in the cost of such liabilities. The
increased volume was largely a function of 12 months of the Belvidere
liabilities, compared to only four months in 1998 and the full year effect of
borrowings incurred to complete the Belvidere transaction. Interest on
interest-bearing deposits increased 19.6% as a 26.1% increase in volume was
partially offset by declining costs. The average rate paid on interest-bearing
deposits decreased to 4.39% in 1999 compared to 4.63% in 1998. The favorable
repricing of the savings and time deposit portfolios and the shift in mixture of
the interest-bearing deposit portfolio towards interest-bearing transaction
accounts and savings accounts from time deposits contributed towards that
decline. Interest on borrowings increased 71.1% as the Company funded loan
growth in the latter three-quarters of the year with non-deposit liabilities.
Additionally, the Company carried 12 months of borrowings for the Belvidere
acquisition on its balance sheet compared to four months in 1998.

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

OTHER OPERATING INCOME AND EXPENSES
Other operating income increased 12.2% to $2.8 million in 1999 from $2.5 million
in 1998. Increases in service charges on deposit accounts of $199,000, brokerage
commissions of $100,000, loan servicing fees of $76,000, gains on sales of
available-for-sale securities and portfolio loans of $69,000 and $144,000
respectively, were offset by declines in gains on sales of mortgages held for
sale of $206,000 and trust fees of $51,000. The service charge, brokerage and
loan servicing increases all related to the inclusion of 12 months of the
Belvidere operation in 1999 compared to four months in 1998. The gain on sale of
portfolio loans was the result of selling MAC's consumer finance loan portfolio
in 1999. The decline in gains on sales of loans held for sale was the result of
the increased rates on fixed rate mortgage loans in 1999. Increasing rates
deteriorated the prices received on loans as well as reduced the volume of loans
originated for sale.

Other operating income increased 62.7% to $2.5 million in 1998 from $1.5 million
in 1997. Gain on sale of loans and brokerage and annuity commissions were the
most significant factors in the increase. A $517,000 increase in the gain on
sales of mortgage loans resulted from the addition of Belvidere for four months
and the favorable rate environment that existed for fixed rate mortgage lending
during 1998. Brokerage and annuity commissions more than doubled as Belvidere's
brokerage operation contributed for four months and sales increased in the
existing branches as the performance of the equity markets attracted customers.
Additionally, service charges and fees on deposits increased $198,000 or 22.2%
and trust fees increased $33,000 or 19.6% between periods. The increase in
service charges and fees was largely attributable to the Belvidere acquisition,
while the increase in trust fees was the result of a larger volume of assets
under management and a higher market value of those assets.

Other operating expenses increased 30.2% to $10.1 million in 1999 from $7.8
million in 1998. The inclusion of Belvidere for a full year in 1999 was the
biggest factor in the increase. Also contributing to the increase was the fact
that the Bank opened a stand-alone branch in Roscoe, Illinois in March 1998.
Salaries and wages increased $652,000 or 19.9% as continued administrative and
back-office consolidation partially offset the additional eight months of
Belvidere's operations in 1999. Amortization of purchase-accounting intangibles
increased $246,000 or 68.7% as Belvidere's amortization began in September of
1998. Furniture and equipment expenditures increased 54.0% as the Company
realized increased depreciation on newer equipment related to Y2K purchases and
due to the additional eight months of Belvidere's operation. Data processing
costs increased 41.0% with the full year effect of Belvidere's operation and Y2K
related processing costs. The organization was forced to postpone its data
processing consolidation until the year 2000. Other operating expenses increased
36.9% or $516,000. Over $300,000 of the increase is attributable to the
additional eight months of Belvidere's operating expenses. The balance of the
increase relates to an


                                       10
<PAGE>   11

approximate 12% increase in miscellaneous operational expenditures. Occupancy
expenses and employee benefits increased 15.3% and 21.6%, respectively, as a
function of the additional eight months of Belvidere's operations.

Other operating expense increased 31.3% to $7.8 million in 1998 from $5.9
million in 1997. Inclusions of Rochelle for a full year and Belvidere for four
months in 1998, along with the amortization of purchased intangibles, were the
biggest factors in the increase. Also contributing to the increase was the fact
that the Bank opened an in-store facility in July 1997 and a stand-alone branch
in the Roscoe, Illinois market in March 1998. Some areas of expense such as data
processing and professional fees did not increase as much as overall expenses.
This was the result of efficiencies gained as a result of merging charters and
merging the data processing system of Rochelle's into Beloit's.

Management monitors three ratios related to other operating income and expense:
(1) Net other operating expense as a percentage of average assets, (2) Standard
efficiency ratio and (3) Gross efficiency ratio. Net other operating expense to
average assets reversed the prior year's trend and increased to 2.54% in 1999
from 2.29% in 1998 and 2.39% in 1997. Considering all assets under management
(mortgage loans serviced for others and managed trust assets) this ratio also
increased over 1998, but remained under 1997 levels. The adjusted ratio was
1.65% in 1999, compared to 1.56% in 1998 and 1.79% in 1997. The standard
efficiency ratio (other operating expense divided by net interest income plus
other operating income) increased to 83.02% in 1999, compared to 68.8% in 1998
and 64.8% in 1997. Adjusted for intangible amortization, the ratio increased to
78.06% in 1999 compared to 65.6% in 1998 and 63.3% in 1997. The gross efficiency
ratio (other operating expense divided by interest income plus other operating
income) increased to 44.2% in 1999 compared to 39.1% in 1998 and 37.3% in 1997.
Adjusted for intangible amortization, the ratio increased to 41.5% in 1999,
compared to 37.2% in 1998 and 36.4% in 1997.

The downward trend in the efficiency ratios was expected, and is attributable to
the newly acquired operations that are not fully integrated into the Company and
to the three new branch office locations opened in 1997 and 1998. These
operations should begin to have a positive impact on the efficiency ratios as
they continue to increase their customer base. The gross efficiency ratio was
negatively impacted by lower general market interest rates which have steadily
reduced the overall yield on earning assets, while the standard efficiency ratio
has been hurt by Belvidere's lower relative margin as compared to the Company's
overall margin.

PROVISIONS FOR LOSSES
The provision for loan losses was $464,000, $315,000 and $192,000 for 1999,
1998, and 1997, respectively. In 1999, the Bank had net charge-offs of $359,000,
(total charge-offs of $408,000 less recoveries of $49,000), compared to 1998
when it had net charge-offs of $375,000, (total charge-offs of $395,000 less
recoveries of $20,000). In 1997, Blackhawk experienced net charge-offs of
$176,000, (total charge-offs of $215,000 less recoveries of $39,000). Net
charge-offs to average loans were 0.20% in 1999, 0.24% in 1998 and 0.14% in
1997.

The allowance for loan losses as a percent of loans was 1.04% at December 31,
1999 compared to 1.08% at December 31, 1998 and to 1.11% at December 31, 1997.
This downward trend continues to be a function of the shift in the Company's
loan mix. With the acquisition of Rochelle and Belvidere, the Company increased
its proportion of one-to-four-family mortgages to total loans.
One-to-four-family mortgages are generally lower risk loans. Management feels
that the allowance for loan losses is adequate based upon the current portfolio
and market conditions. As the loan portfolio shifts and market conditions
warrant, the allowance may be adjusted.

INCOME TAXES
The effective income tax rate decreased to 30.9% in 1999 from 37.2% in 1998 and
35.3% in 1997. Contributing to the decline in the tax rates were the increased
holdings of tax-exempt municipal securities, the percentage of income being
generated by the Company's Nevada subsidiary and the increased Illinois state
tax-exempt agency investment holdings. Income generated at Nevahawk is not
subject to state income taxes while certain U.S. Government Agency investments
qualify for state tax exemption for the Bank within Illinois. Offsetting these
benefits was the increase in non-deductible amortization of purchase-related
premiums and goodwill.

BALANCE SHEET ANALYSIS
Total assets as of December 31, 1999 were $295.7 million compared to $291.5
million as of December 31, 1998. Asset growth was subdued in relation to 1998
and 1997 as the Company refrained from acquiring institutions in 1999 and turned
the focus to integration and internal growth.


                                       11
<PAGE>   12

CASH AND CASH EQUIVALENTS
Cash and equivalents were $12.0 million as of December 31, 1999 compared to $9.6
million at December 31, 1998. As the end of the century approached, Blackhawk,
like other financial institutions, had higher levels of cash on hand in
preparation for extraordinary consumer withdrawals. By the century date change
weekend depositors had demonstrated their confidence in the Company's
preparedness by refraining from withdrawing large sums and the emergency cash
went unused. The excess cash was quickly reduced during the month of January
2000 to levels comparable to the end of 1998.

INTEREST-BEARING DEPOSIT ACCOUNTS
The reduction of interest-bearing deposits to $4.6 million as of December 31,
1999, from $6.4 million on December 31, 1998 was the result of increasing cash
on hand as cash inventories are managed through lower-yielding liquid assets
such as interest-bearing deposits.

FEDERAL FUNDS SOLD AND OTHER SHORT-TERM INVESTMENTS
Federal funds sold and short-term investments decreased dramatically to $0.1
million as of December 31, 1999 from $22.8 million as of December 31, 1998. In
the late first quarter and early second quarter of 1999, short-term liquid funds
were invested in short-to-medium-term securities to improve asset yields.

SECURITIES
Available-for-sale securities grew $18.1 million, to $49.1 million as of
December 31, 1999 from $31.0 million as of December 31, 1998. As mentioned
above, much of this increase was the result of redeploying federal funds sold
and short-term investments. Securities classified as held-to-maturity declined
approximately $2.2 million, or 10%, to $19.7 million from $21.9 million.

LOANS HELD FOR SALE
As of December 31, 1999, loans held for sale were approximately $0.5 million
compared to nearly $4.4 million on December 31, 1998. These loans are generally
long-term fixed-rate loans which lost much of their consumer appeal later in
1999 as rates increased from 1998's 30-year lows.

LOANS
Net portfolio loans increased 8.0% during 1999 to $190.2 million at December 31,
1999 from $176.0 million at December 31, 1998. As intended, commercial and
consumer lending which achieves the Company's objective of restructuring the
balance sheets of its acquired thrift organizations fueled growth in the loan
portfolio. Growth rates in commercial (including commercial real estate) and
consumer loans were 42.3% and 10.1% respectively during 1999. The consumer
portfolio growth occurred in spite of the Company divesting its subsidiary's
consumer finance loan portfolio consisting of $1.7 million in outstandings.
Residential mortgage loans decreased 5.6% during 1999 as borrowers refinanced
out of adjustable rate mortgages early in 1999 to lock in long-term fixed rates.
The Company generally sells such loans into the secondary market.

BANK PREMISES AND EQUIPMENT
The decrease to $7.1 million as of December 31, 1999 from $7.5 million the
previous year-end was the result of depreciation offset partially by the
acquisition of new equipment. New equipment purchases totaled $660,000. Most
purchases were to replace and upgrade equipment in anticipation of Y2K.

INTANGIBLE ASSETS
These assets consist of goodwill and purchase premiums resulting from the
purchases of the Rochelle and Belvidere institutions as well as originated
mortgage servicing rights. The decrease in intangible assets between December
31, 1999 and December 31, 1998 was primarily the result of the amortization of
the purchase-accounting intangible assets.

DEPOSITS
Total deposits at December 31, 1999 were $234.1 million. This compares to $241.4
million at December 31, 1998. The Company experienced significant price
competition on interest-bearing deposits in several of its markets and elected
to shift towards alternative funding sources to attempt to preserve its interest
margin. With the exception of money market accounts, the balances in each type
of interest-bearing deposit liability decreased during 1999. Pricing pressures
continued through the end of 1999 and are expected to persist in the short-term.
As a result, time deposits may continue to decline as a percentage of
liabilities.


                                       12
<PAGE>   13

OTHER BORROWINGS
The use of alternative funding sources increased during 1999. Other borrowings
increased to $35.4 million as of December 31, 1999 compared to $21.7 million as
of December 31, 1998. Because of pricing considerations, deposit growth has not
been sufficient to fund growth and increases in other borrowings can be expected
to continue. The primary source for these borrowings has been, and is expected
to continue to be, the Federal Home Loan Bank of Chicago ("FHLB"). Advances from
the FHLB as of December 31, 1999 totaled $19.7 million.

ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of identifying, measuring and managing
the risk to the Company's earnings and capital resulting from the movements in
interest rates. It is the Company's objective to protect earnings and capital
while achieving liquidity, profitability and strategic goals.

During 1999 the Company began to focus its measure of interest rate risk on the
effect a shift in interest rates would have on earnings rather than on the
amount of assets and/or liabilities subject to repricing in a given time period.
Since not all assets or liabilities move at the same rate and at the same time,
a determination must be made as to how each interest earning asset and each
interest bearing liability adjusts with each change in the base rate. The
Company develops, evaluates and amends its assumptions on an ongoing basis and
analyzes its earnings exposure monthly.

In addition to the effect on earnings, a monthly evaluation is made to determine
the change in the economic value of the equity with various changes in interest
rates. This determination indicates how much the value of the assets and the
value of the liabilities change with a specified change in interest rates. The
net of the economic values of the assets and liabilities results in an economic
value of equity.

LIQUIDITY
Liquidity as it relates to the subsidiary bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal source of funds are deposits, scheduled amortization and prepayment of
loan principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing federal funds, sales of loans,
sales of securities, borrowing from the Federal Reserve Bank and the FHLB and
capital loans. Current year earnings can be paid to the Bank, from Nevahawk, to
provide additional liquidity, without incurring a tax liability under present
law.

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

CAPITAL
Total shareholders equity as of December 31, 1999 was $23.3 million compared to
$24.4 million as of December 31, 1998. The decrease primarily resulted from the
net decline in the market value of securities available for sale. The capital
ratios of the Company are in excess of the regulatory requirements. Core capital
as a percent of risk based assets for 1999 is 9.52% compared to a December 31,
1998 ratio of 8.36% and a regulatory requirement of 4.00%. Total capital as a
percent of risk based assets for 1999 is 10.61% compared to a December 31, 1998
ratio of 9.31% and a regulatory requirement of 8.00%. The leverage ratio for the
Company is 6.10% compared to a December 31, 1998 ratio of 6.00% and a 3.00%
regulatory requirement.

IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, most of the assets and liabilities of the Bank
are monetary in nature. Consequently, interest rates have more significant
impact on the Company's performance and results of operations than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously under
Asset/Liability Management, the Bank's interest rate exposure 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


                                       13
<PAGE>   14

results of operations in terms of historical dollars, without giving
consideration to changes in the relative purchasing power of money over time due
to inflation.

ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires and entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 2000. Management, at this
time, cannot determine the effect adoption of this statement may have on the
consolidated financial statements of the Company as the accounting for
derivatives is dependent on the amount and nature of derivatives in place at the
time of adoption.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur include, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions.


ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Incorporated by reference to pages 30 through 49 of this report on Form 10-KSB.

Following are supplemental data tables of the Company:
TABLE 1 RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>

                 Average Balance           Average Rate                                                   Interest Earned or Paid
<S>          <C>        <C>      <C>      <C>       <C>    <C>                                            <C>       <C>       <C>
   1999      1998       1997     1999     1998      1997                                                  1999      1998      1997
                                                            Interest Earning Assets:
    54,669    39,314    35,778    5.93%     6.31%     6.52%    Taxable investment                            3,240    2,482   2,331
                                                            securities
    11,343     5,992     3,394    5.91%     6.53%     6.33%    Tax-exempt investment securities                670      391     215

    66,012    45,306    39,172    5.62%     6.34%     6.50%       Total investments                          3,910    2,873   2,546

   181,089   153,600   125,403    8.74%     9.10%     9.25%    Loans                                        15,821   13,975  11,597
     4,201     6,948     2,678    6.86%     5.39%     5.30%    Federal funds sold & short term investments     288      375     142
    11,585     4,461     2,103    2.17%     5.15%     4.09%    Interest bearing deposits in banks              251      230      86

   262,887   210,315   169,356    7.71%     8.30%     8.49% TOTAL EARNING                                   20,270   17,453  14,371
                                                            ASSETS

                                                            Interest Bearing Liabilities:
    17,468    13,776    10,786    1.08%     1.18%     1.40%    Interest bearing demand deposits                189      162     151
    62,869    47,645    34,960    2.97%     3.19%     3.05%    Savings deposit                               1,866    1,519   1,065
   125,920   102,083    80,557    5.55%     5.77%     5.85%    Time deposits                                 6,994    5,888   4,715

   206,257   163,504   126,303    4.39%     4.63%     4.70%       Total interest bearing deposits            9,049    7,569   5,931

    21,732     6,897    11,651    2.97%     5.28%     5.25% Short-term borrowings                              646      364     612
     6,873    10,795     2,999   14.71%     5.60%     5.90% Long-term borrowings                             1,011      604     177
</TABLE>



                                       14
<PAGE>   15

<TABLE>
<CAPTION>

TABLE 1 RATE/VOLUME ANALYSIS (CONTINUED)
<S><C>
   234,862   181,196   140,953    4.56%     4.71%     4.77% TOTAL INTEREST BEARINGS LIABILITIES          10,706     8,538    6,720

                                  3.07%     3.59%     3.72% INTEREST RATE
                                                            SPREAD

                                                            NET INTEREST
                                                            MARGIN/
                                  3.64%     4.24%     4.52%  NET INTEREST                                 9,565     8,915    7,651
                                                            INCOME
</TABLE>

<TABLE>
<CAPTION>

                                                  1999 Compared to 1998                       1998 Compared to 1997
                                        Increase (Decrease) due to                   Increase (Decrease) due to
                                        Rate/Volume                                  Rate/Volume

                                                             Rate/                                        Rate/
                                        Rate      Volume     Volume     Net            Rate    Volume    Volume     Net
<S>                                     <C>       <C>        <C>        <C>            <C>     <C>       <C>        <C>
Interest Earning Assets:
   Taxable investment                       (151)       969     (59)       759           (72)       230       (7)      151
securities
   Tax-exempt investment securities          (37)       349     (33)       279              6       165         5      176

      Total investments                     (188)     1,318     (92)     1,038           (66)       395       (2)      327

   Loans                                    (557)     2,501    (100)     1,844          (189)     2,612      (45)    2,379
   Federal funds sold & short term
      investments                             100     (148)     (39)      (87)              3       226         4      233
   Interest bearing deposits in banks       (133)       367    (213)        21             22        97        25      143

   TOTAL EARNING ASSETS                     (778)     4,038    (444)     2,816          (230)     3,330      (18)    3,082


Interest Bearing Liabilities:
   Interest bearing demand deposits          (13)        44      (4)        27           (24)        42       (7)       11
   Savings deposits                         (106)       486     (34)       346             50       386        18      454
   Time deposits                            (220)     1,375     (51)     1,104           (69)     1,260      (18)    1,173

      Total interest bearing deposits       (339)     1,905     (89)     1,477           (43)     1,688       (7)    1,638

   Short-term borrowings                    (159)       783    (342)       282              2     (250)       (1)    (248)
   Long-term borrowings                       983     (220)    (357)       406            (9)       460      (24)      427

TOTAL INTEREST BEARING
   LIABILITIES                                485     2,468    (788)     2,165           (50)     1,899      (32)    1,817

NET INTEREST MARGIN                       (1,263)     1,570      344       651          (180)     1,431        14    1,265
</TABLE>


                                      15
<PAGE>   16



Table 2
ANALYSIS OF  LOAN PORTFOLIO

<TABLE>
<CAPTION>

                                                          1999                        1998                           1997
(in thousands)                                                    % of                       % of                           % of
                                                  Amount          Total       Amount        Total           Amount          Total
<S>                                               <C>             <C>         <C>           <C>             <C>             <C>
Real estate-mortgage                              136,943         71.80%     130,924         72.58%          83,398         60.98%
Real estate-construction                            2,047          1.07%       3,535          1.96%           3,956          2.89%
Real estate-held-for-sale                             540          0.28%       4,362          2.42%           1,024          0.75%
Consumer                                           29,224         15.32%      26,532         14.71%          25,006         18.28%
Commercial                                         23,965         12.57%      17,131          9.50%          25,333         18.52%

Gross loans                                       192,719        101.05%     182,484        101.16%         138,717        101.42%


Unearned income                                         0          0.00%       (180)         -0.10%           (420)         -0.31%
Allowance for loan loss                           (1,996)         -1.05%     (1,915)         -1.06%         (1,523)         -1.11%


Net loans                                         190,723        100.00%     180,389        100.00%         136,774        100.00%
</TABLE>

ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY

<TABLE>
<CAPTION>
                                                             Percent of                Percent of                      Percent of
                                                            Gross Loans                Gross Loans                     Gross Loans
                                              Amount        by Category    Amount      by Category       Amount        by Category
<S>                                           <C>           <C>            <C>         <C>               <C>           <C>
Real estate-mortgage                               677         33.92%         705         36.81%             545         35.78%
Real estate-construction                             0          0.00%           0          0.00%               0          0.00%
Consumer                                           578         28.96%         644         33.63%             353         23.18%
Commercial                                         741         37.12%         566         29.56%             625         41.04%
Commercial Paper                                     0          0.00%           0          0.00%               0          0.00%

Total                                            1,996        100.00%       1,915        100.00%           1,523        100.00%
</TABLE>

SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>

                                                             December 31,
                                                    1999           1998         1997
<S>                                                <C>            <C>         <C>
Allowance for loan losses, beginning                1,915          1,523       1,186
Amounts associated with acquisition                     0            452         321
Amounts associated with sale                           24              0           0
Amounts charged-off:
   Real estate-mortgage                                94              1         110
   Consumer                                           314            180         104
   Commercial                                           0            214           1
      Total Charge-offs                               408            395         215

</TABLE>

                                       16
<PAGE>   17

Table 2 (Continued)
<TABLE>

<S>                                                 <C>            <C>         <C>
Recoveries on amounts previously charge-off:
   Real estate-mortgage                                 5              0           2
   Consumer                                            44             13          17
   Commercial                                           0              7          20
      Total recoveries                                 49             20          39
      Net charge-offs                                 359            375         176
Provision charged to expense                          464            315         192
Allowance for loan losses, ending                   1,996          1,915       1,523

NON-PERFORMING LOANS AT PERIOD END
Impaired loans                                      1,984          2,389         325
Non-accrual                                           565            857         610
Past due 90 days or more and still accruing           529            240         143
   Total non-performing loans                       3,078          3,486       1,078

RATIOS
Allowance for loan loss to period-end loans         1.04%          1.08%       1.11%
Net charge-offs to average loans                    0.20%          0.24%       0.14%
Recoveries to charge-offs                          12.01%          5.06%      18.14%
Non-performing loans to gross loans                 1.60%          1.41%       0.78%

EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized                                      35             33          34
Income that would have been recognized in              73             76          78
accordance with the original loan terms
</TABLE>

                                       17
<PAGE>   18



Table 3
OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>


                                                  1999                         1998                         1997
(in thousands)                                             % of                         % of                        % of
                                                          Average                      Average                     Average
                                          Amount          Assets        Amount         Assets        Amount         Assets
<S>                                       <C>             <C>            <C>            <C>           <C>           <C>
Non-interest expense                      10,098          3.52%          7,757          3.37%        5,909          3.23%
Non-interest income                        2,806          0.98%          2,499          1.09%        1,536          0.84%

Net non-interest expense                   7,292          2.54%          5,258          2.28%        4,373          2.39%
</TABLE>

Table 4
Three-Year Comparison of Average Balance Sheets

<TABLE>
<CAPTION>

                                                                         Years Ended December 31,
                                                      1999                      1998                          1997
                                                          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                  4,201       1.47%        6,948          3.02%            2,678          1.46%
   Interest bearing deposits
    in banks                                    11,585       4.04%        4,461          1.94%            2,103          1.15%
   Taxable investment securities
    securities                                  54,669      19.07%       39,314         17.10%           35,793         19.55%
   Tax-exempt investment
    securities                                  11,343       3.96%        5,992          2.61%            3,394          1.85%
  Loans, net of unearned
    income                                     181,089      63.18%      153,600         66.82%          124,008         67.74%

     Total earning assets                      262,887      91.72%      210,315         91.49%          167,976         91.76%

   Cash and due from banks                       5,256       1.83%        7,988          3.47%            6,426          3.51%
   Bank premises and equipment                   7,065       2.46%        5,544          2.41%            4,305          2.35%
   Other non-earning assets                     11,460       4.00%        6,039          2.63%            4,361          2.38%

     Total non-earning assets                   23,781       8.30%       19,571          8.51%           15,092          8.24%

TOTAL ASSETS                                   286,668     100.00%      229,886        100.00%          183,068        100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:

   Interest bearing demand                      17,468       6.09%       13,776          5.99%           10,786          5.89%
   Savings accounts                             62,869      21.93%       47,645         20.73%           34,960         19.10%
   Time deposits                               125,920      43.93%      102,083         44.41%           80,557         44.00%

    Total interest bearing
     deposits                                  206,257      71.96%      163,504         71.12%          126,303         68.99%
</TABLE>


                                       18
<PAGE>   19

 Table 4  (Continued)

<TABLE>
<S>                                            <C>         <C>          <C>             <C>             <C>             <C>
   Short-term borrowings                        21,732       7.58%        6,897          3.00%           11,651          6.36%
   Long-term borrowings                          6,873       2.40%       10,795          4.70%            2,999          1.64%

    Total interest bearing
      liabilities                              234,862      81.94%      181,196         78.82%          140,953         76.99%

   Non-interest bearing deposits                25,538       8.91%       21,941          9.54%           16,510          9.02%
   Other liabilities                             2,394       0.84%        3,252          1.41%            2,902          1.59%

    Total liabilities                          262,794      91.68%      206,389         89.78%          160,365         87.60%

  Stockholders' Equity/Capital                  23,874       8.33%       23,497         10.22%           22,703         12.40%

TOTAL LIABILITIES AND
  STOCKHOLDERS EQUITY/CAPITAL                  286,668     100.00%      229,886        100.00%          183,068        100.00%

</TABLE>

Table 5
INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                      December 31,
                                          1999            1998            1997
<S>                                      <C>            <C>             <C>
Available-for-Sale
US Treasury                                 246             503           1,252
US Government Agency                     42,745          27,060           7,389
Tax-exempt obligations                      155             162               0
Other securities                          5,925           3,257             847

Total market value of
 investment securities                   49,071          30,982           9,488

Held-to-Maturity
US Treasury                               2,000           5,058          10,191
US Government Agency                      5,225           8,895          13,900
Tax-exempt obligations                   12,471           8,135           4,341
Other securities                              0               0             488

Total book value of
 investment securities                   19,696          22,088          28,920

Total market value of
 investment securities                   19,373          21,896          29,073

Total Securities                         68,767          53,070          38,408
</TABLE>


                                       19
<PAGE>   20



TABLE 6
INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                       Within           After One          After Five           After
                                      One Year         but Within         but Within         Ten Years
                                                       Five Years          Ten Years
                                  Amount    Yield     Amount  Yield      Amount   Yield    Amount   Yield
<S>                               <C>       <C>       <C>     <C>        <C>      <C>      <C>    <C>
Available-for-Sale
US Treasury                            246   6.07%         0   0.00%        0    0.00%        0   0.00%
US Government Agency                 1,294   5.54%    31,744   6.12%    6,042    6.65%    3,665   6.19%
Tax-exempt obligations                   0   0.00%         0   0.00%        0    0.00%        0   0.00%
Other securities                       502   6.35%     3,517   5.88%        0    0.00%    2,061   6.16%

Total                                2,042   5.80%    35,261   6.10%    6,042    6.65%    5,726   6.18%

Held-to-Maturity
US Treasury                          2,000   6.03%         0   0.00%        0    0.00%        0   0.00%
US Government Agency                     0   0.00%       501   5.80%      418    5.80%    4,307   6.12%
Tax-exempt obligations                 715   4.44%     7,810   4.17%    3,945    4.31%        0   0.00%
Other securities                         0   0.00%         0   0.00%        0    0.00%        0   0.00%

Total                                2,715   5.61%     8,311   4.27%    4,363    4.45%    4,307   6.12%

Grand Total                          4,757   5.69%    43,572   5.75%   10,405    5.73%   10,033   6.15%
</TABLE>

Table 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31,1999

<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                 42,847         67,116          26,981        136,944          57,632         36,465
Real estate-construction              1,790            257               0          2,047             257              0
Consumer                             10,665         17,996             563         29,224          17,423          1,136
Commercial                            8,683         12,601           2,681         23,965          12,399          2,883

Gross Loans                          63,985         97,970          30,225        192,180          87,711         40,484

</TABLE>


                                       20
<PAGE>   21



Table 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                   1999                             1998
                                    Average   Percent of  Average    Average    Percent of    Average
(in thousands)                      Balance     Total       Rate     Balance      Total        Rate
<S>                                 <C>       <C>         <C>        <C>        <C>           <C>
Non-interest bearing demand            25,538     11.02%     --         21,941       11.83%     --
deposits
Interest bearing demand deposits       17,468      7.54%      1.08%     13,776        7.43%       1.18%
Savings deposits                       62,869     27.12%      2.95%     47,645       25.69%       3.19%
Time deposits                         125,920     54.32%      5.56%    102,083       55.05%       5.77%

Total                                 231,795    100.00%      4.38%    185,445      100.00%       4.63%

<CAPTION>

                                             Years Ended December 31,
                                                       1997
                                      Average     Percent of     Average
(in thousands)                        Balance       Total         Rate
<S>                                   <C>         <C>            <C>
Non-interest bearing demand               16,510       11.56%      --
deposits
Interest bearing demand deposits          10,786        7.55%       1.40%
Savings deposits                          34,960       24.48%       3.05%
Time deposits                             80,557       56.41%       5.85%

Total                                    142,813      100.00%       4.70%
</TABLE>


Table 9
Interest Rate Risk Analysis
December 31, 1999

<TABLE>
<CAPTION>
                                                                            Time Remaining to Maturity
                                                            Due Within     Four to    Seven  to      After
(in thousands)                                              3 months      6 months    12 months    12 months       Total
<S>                                                        <C>            <C>         <C>          <C>             <C>
Certificates of Deposit
   Less than $100,000                                         26,051       19,062       17,176       36,434         98,723
   More than $100,000                                         11,768        6,721        5,319        3,504         27,312

Total                                                         37,819       25,783       22,495       39,938        126,035
</TABLE>

TABLE 10
Short-term Borrowing

<TABLE>
<CAPTION>

                                                              1999           1998          1997
<S>                                                          <C>            <C>          <C>
Balance outstanding December 31,
Repurchase agreements                                         4,164          4,576       10,256
Fed funds purchased                                           4,400              0            0
FHLB Open line of credit                                     10,000              0        1,975
                                                      ------------------------------------------
                                                             18,564          4,576       12,231
                                                      ==========================================

Weighted rate December 31,
Repurchase agreements                                         3.25%          4.51%        5.28%
Fed funds purchased                                           4.00%          0.00%        5.96%
FHLB Open line of credit                                      4.74%          0.00%        0.00%
                                                      ==========================================
                                                              4.23%          4.51%        5.39%
                                                      ==========================================
Maximum month-end outstanding balance
Repurchase agreement                                         10,121         11,387       17,038
Fed funds purchased                                          13,500          1,600        4,150
FHLB Open line of credit                                     10,000              0            0
</TABLE>


                                       21
<PAGE>   22
Table 10 (Continued)

<TABLE>
<CAPTION>

                                                               1999          1998          1997
<S>                                                          <C>             <C>         <C>
Year-to-date average amount outstanding
Repurchase agreements                                         3,734          6,411       11,970
Fed funds purchased                                           6,873            486          441
FHLB Open line of credit                                      1,570              0            0
                                                      ------------------------------------------
                                                             12,177          6,897       12,411
                                                      ==========================================
Year-to-date average weighted rate
Repurchase agreements                                         4.93%          5.20%        5.25%
Fed funds purchased                                           5.64%          6.34%        5.25%
FHLB Open line of credit                                      5.62%          0.00%        0.00%
                                                      ------------------------------------------
                                                              5.41%          5.28%        5.25%
                                                      ==========================================
</TABLE>

Table 11
Interest Rate Risk Analysis
December 31, 1999
<TABLE>
<CAPTION>

                                                                    Two-         Four-     Seven-      Ten-      Over
                                                         One        three         six       nine      twelve     One
(in thousands)                                          Month      months       months     months     months     year         Total
<S>                                                     <C>        <C>          <C>        <C>        <C>       <C>         <C>
Federal funds sold and short-term investments                91          0           0         0           0          0          91
Interest bearing deposits                                 4,616          0           0         0           0          0       4,616
Taxable investment securities                             2,221      1,504       1,698         0         770     50,103      56,296
Tax-exempt investment securities                            410          0         180         0         126     11,755      12,471
Loans                                                    12,838     18,602      20,398    12,487      15,262    113,132     192,719

Total interest-earning assets                            20,176     20,106      22,276    12,487      16,158    174,990     266,193

</TABLE>


Table 12
Selected Equity Ratios

<TABLE>
<CAPTION>
                                                         1999        1998      Regulatory
                                                        Ratio       Ratio     Requirement
<S>                                                     <C>          <C>      <C>
Equity as a percent of assets                             7.89%        10.22%          N/A
Core capital as a percent of risk based assets            9.52%         8.36%        4.00%
Total capital as a percent of risk based assets          10.61%         9.31%        8.00%
Leverage ratio                                            6.10%         6.00%        3.00%

</TABLE>

Table 13
Selected Financial Ratios

<TABLE>
<CAPTION>

                                                              1999           1998          1997          1996            1995
<S>                                                        <C>              <C>          <C>             <C>            <C>
Return on average assets                                      0.39%          0.87%        1.07%           1.16%          1.05%
Return on average equity                                      4.64%          8.33%        8.61%           7.85%          7.06%
Average equity to average assets                              7.43%         10.22%       12.40%          14.54%         13.62%
Dividend payout ratio                                       100.18%         53.41%       50.00%          50.67%         46.88%
Interest rate spread                                          2.98%          3.59%        3.72%           3.39%          3.39%
Net interest margin                                           3.06%          4.24%        4.52%           4.33%          4.27%
Net non-interest expense to assets                            3.42%          2.29%        2.38%           2.15%          2.86%
Efficiency ratio                                             83.02%         68.82%       64.76%          60.76%         64.13%
Allowance for loan losses to total loans at end of            1.04%          1.08%        1.11%           1.19%          0.98%
period
</TABLE>


                                       22
<PAGE>   23





         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 17, 2000 is incorporated herein by this
              reference.

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

         ITEM 10  EXECUTIVE COMPENSATION

         The information that will appear under "Director and Executive
         Compensation" in the definitive Proxy Statement to be prepared and
         filed for the Company's Annual Meeting of Stockholders on May 17, 2000
         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 17, 2000 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 17,
         2000 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 1999.



                                       23

<PAGE>   24


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 30, 2000.


                                     Blackhawk Bancorp, Inc.



                                     By /s/ James P. Kelley
                                        -------------------------------------
                                       James P. Kelley
                                       Executive Vice President and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 30, 2000.



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

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


Directors:


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

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

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

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




                                       24









<PAGE>   25



                             Blackhawk Bancorp, Inc.
                                Exhibit Index To
                        1999 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
                Articles of Incorporation          Amendment No. 1 to  Registration
                of Blackhawk Bancorp, Inc.         Statement on Form S-1(Reg. No.
                                                   33.32351)

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

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

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

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

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

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

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

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

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



                                       25

<PAGE>   26
<TABLE>
<CAPTION>
                                                                                               Filed
Exhibit                                            Incorporated Herein                         Here-
Number          Description                        By Reference To:                            with             Page No.
------          -----------                        ----------------                            ----             --------
<S>             <C>                                <C>                                         <C>              <C>
10.5            Blackhawk Bancorp, Inc.            Exhibit 10.5 to Amendment No. 1
                Directors' Stock  Option Plan      to Registration Statement Form
                                                   S-1 (No. 33-32351)

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


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

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

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

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

13              1999 Annual Report To              Proxy Statement for its Annual
                Stockholders                       Meeting of Stockholders on May 17,
                                                   2000, dated April 7, 2000


21              Subsidiaries of                                                                     X
                Registrant

22              Proxy Statement for its
                Annual Meeting of
                Stockholders on May 17, 2000

27              Financial Data Schedule                                                             X
</TABLE>









                                       26


<PAGE>   27

                             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.................................30

Consolidated Balance Sheets - December 31, 1999
  and 1998 ..............................................................31

Consolidated Statements of Income for the years ended
  December 31, 1999, 1998 and 1997 ......................................32

Consolidated Statements of Stockholders' Equity for
  the years ended December 31, 1999, 1998 and 1997.......................33

Consolidated Statements of Cash Flows for the years
  ended December 31, 1999, 1998 and 1997 ................................34
Notes to the Consolidated Financial Statements...........................36-49








                                       27
<PAGE>   28



                             BLACKHAWK BANCORP, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1999




                                       28


<PAGE>   29



INDEPENDENT AUDITOR'S REPORT




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


We have audited the accompanying consolidated balance sheets of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Blackhawk Bancorp, Inc. and Subsidiary for the year ended December 31, 1997,
was audited by other auditors whose report dated February 20, 1998, expressed an
unqualified opinion on those statements.

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

In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Blackhawk Bancorp, Inc. and Subsidiary at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.



/s/ Wipfli Ullrich Bertelson LLP

Wipfli Ullrich Bertelson LLP
February 4, 2000
Green Bay, Wisconsin




                                       29
<PAGE>   30


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                          1999             1998
                                                                                          ----             ----
ASSETS
<S>                                                                                 <C>               <C>
Cash and cash equivalents                                                           $    11,994,000   $     9,598,000
Interest-bearing deposit accounts                                                         4,616,000         6,375,000
Federal Funds sold and other short-term investments                                          91,000        22,828,000
Securities:
    Available-for-sale                                                                   49,071,000        30,982,000
    Held-to-maturity, fair value of $19,373,000 in 1999 and $20,088,000 in 1998          19,696,000        21,896,000
Loans held for sale                                                                         540,000         4,362,000
Loans, net of allowance for loan losses of  $1,996,000 in 1999 and $1,915,000 in        190,184,000       176,027,000
1998
Bank premises and equipment, net                                                          7,065,000         7,483,000
Accrued interest receivable                                                               2,028,000         1,908,000
Intangible assets                                                                         7,511,000         8,152,000
Other assets                                                                              2,888,000         1,857,000
                                                                                    ---------------   ---------------

    Total Assets                                                                    $   295,684,000   $   291,468,000
                                                                                    ===============   ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
    Deposits:
        Non-interest bearing                                                        $    30,552,000   $    33,110,000
        Interest bearing                                                                203,573,000       208,285,000
                                                                                    ---------------   ---------------
             Total deposits                                                             234,125,000       241,395,000
                                                                                    ---------------   ---------------
    Borrowed funds:
        Short-term borrowings                                                            18,564,000         4,576,000
        Long-term borrowings                                                             16,803,000        17,123,000
                                                                                    ---------------   ---------------
             Total borrowed funds                                                        35,367,000        21,699,000
                                                                                    ---------------   ---------------
    Accrued interest payable                                                              1,030,000         1,046,000
    Other liabilities                                                                     1,837,000         2,928,000
                                                                                    ---------------   ---------------

             Total Liabilities                                                          272,359,000       267,068,000
                                                                                    ---------------   ---------------
SHAREHOLDERS' EQUITY
    Preferred stock, $.01 par value per share; authorized
        1,000,000 shares; issued, none                                                            -                 -
    Common stock, $.01 par value per share; authorized
        10,000,000 shares; issued 2,324,673 in 1999 and 2,313,373 in 1998                    23,000            23,000
    Additional paid in capital                                                            7,178,000         7,099,000
    Employee stock options earned                                                           129,000           130,000
    Retained earnings                                                                    16,973,000        16,975,000
    Treasury stock, 10,324 shares, at cost                                                 (120,000)         (120,000)
    Accumulated other comprehensive income (deficit)                                       (858,000)          293,000
                                                                                    ----------------  ---------------

        Total Shareholders' Equity                                                       23,325,000        24,400,000
                                                                                    ---------------   ---------------

        Total Liabilities and Shareholders' Equity                                  $   295,684,000   $   291,468,000
                                                                                    ===============   ===============
</TABLE>
















                 See Notes to Consolidated Financial Statements


                                       30

<PAGE>   31


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>

                                                                          1999             1998            1997
                                                                          ----             ----            ----
Interest Income:
<S>                                                                  <C>              <C>             <C>
   Interest and fees on loans                                        $  15,817,000    $  13,975,000   $   11,597,000
   Interest on securities:
      Taxable                                                            3,240,000        2,482,000        2,433,000
      Exempt from federal income taxes                                     467,000          265,000          152,000
   Interest on federal funds sold and other short-term investments         288,000          363,000           41,000
   Interest on interest-bearing deposits                                   251,000          241,000           85,000
                                                                     -------------    -------------   --------------
      Total interest income                                             20,063,000       17,326,000       14,308,000
                                                                     -------------    -------------   --------------

Interest Expense:
   Interest on deposits                                                  9,049,000        7,569,000        5,931,000
   Interest on short-term borrowings                                       646,000          364,000          612,000
   Interest on long-term borrowings                                      1,011,000          621,000          177,000
                                                                     -------------    -------------   --------------
      Total interest expense                                             10,706,000       8,554,000        6,720,000
                                                                     --------------   -------------   --------------
      Net interest income                                                9,357,000        8,772,000        7,588,000

Provision for loan losses                                                  464,000          315,000          192,000
                                                                     -------------    -------------   --------------
      Net interest income after provision for loan losses                8,893,000        8,457,000        7,396,000
                                                                     -------------    -------------   --------------
Other Operating Income:
   Service charges on deposit accounts                                   1,294,000        1,095,000          897,000
   Gain on sale of mortgage loans                                          414,000          620,000          103,000
   Brokerage and annuity commissions                                       338,000          228,000          100,000
   Trust department income                                                 150,000          201,000          168,000
   Loan servicing fees                                                     146,000           70,000           57,000
   Gain on sales of securities                                              69,000                -                -
   Other income                                                            395,000          285,000          211,000
                                                                     -------------    -------------   --------------
      Total other operating income                                       2,806,000        2,499,000        1,536,000
                                                                     -------------    -------------   --------------

Other Operating Expenses:
   Salaries and wages                                                    3,924,000        3,272,000        2,436,000
   Employee benefits                                                       887,000          730,000          631,000
   Occupancy expense, net                                                  681,000          590,000          426,000
   Furniture and equipment                                                 804,000          522,000          329,000
   Data processing                                                         764,000          542,000          445,000
   Professional fees                                                       236,000          174,000          342,000
   Advertising and marketing                                               284,000          171,000          139,000
   Amortization of intangible assets                                       604,000          358,000          137,000
   Other operating expenses                                              1,914,000        1,398,000        1,024,000
                                                                     -------------    -------------   --------------
      Total other operating expenses                                    10,098,000        7,757,000        5,909,000
                                                                     -------------    -------------   --------------
      Income before income taxes                                         1,601,000        3,199,000        3,023,000
   Provision for income taxes                                              494,000        1,189,000        1,067,000
                                                                     -------------    -------------   --------------
        Net Income                                                   $   1,107,000    $   2,010,000   $    1,956,000
                                                                     =============    =============   ==============

        Basic Earnings Per Share                                     $        0.48    $        0.88   $        0.86
                                                                     =============    =============   =============
        Diluted Earnings Per Share                                   $        0.46    $        0.83   $        0.82
                                                                     =============    =============   =============
        Dividends Per Share                                          $        0.48    $        0.47   $        0.43
                                                                     =============    =============   =============
</TABLE>



















                 See Notes to Consolidated Financial Statements



                                       31
<PAGE>   32


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997



<TABLE>
<CAPTION>

                                                                    Additional
                                                         Common       Paid In       Stock       Retained     Treasury
                                                          Stock       Capital      Options      Earnings      Stock
                                                          -----       -------      -------      --------      -----
<S>                                                    <C>          <C>           <C>         <C>           <C>
Balance December 31, 1996                              $  23,000    $ 6,960,000   $  95,000   $15,072,000   $ (84,000)

Net Income                                                                                      1,956,000
Other comprehensive income

Total comprehensive income
Principal payments on ESOP loan
Cash dividends declared on common stock                                                          (983,000)
Purchase of stock for treasury, 1,700 shares at
$11.69 per share                                                                                              (20,000)
Compensatory employee stock options:
    Recognized                                                                       36,000
    Exercised or expired                                                 42,000
                                                       ---------    -----------   ---------   -----------   ---------
Balance December 31, 1997                                 23,000      7,002,000     131,000    16,045,000    (104,000)

Net Income                                                                                      2,010,000
Other comprehensive income

Total comprehensive income
Cash dividends declared on common stock                                                        (1,080,000)
Purchase of stock for treasury, 1,046 shares at
$15.00 per share                                                                                              (16,000)
Exercise of non-compensatory stock options                               97,000
Compensatory employee stock options:
    Recognized                                                                       (1,000)
                                                       ---------    -----------   ----------  -----------   ---------
Balance December 31, 1998                                 23,000      7,099,000     130,000    16,975,000    (120,000)

Net Income                                                                                      1,107,000
Other comprehensive loss

Total comprehensive loss
Cash dividends declared on common stock                                                        (1,109,000)
Exercise of non-compensatory stock options                               78,000
Compensatory employee stock options:
    Exercised or expired                                                  1,000      (1,000)
                                                       ---------    -----------   ----------  -----------   ---------
Balance December 31, 1999                              $  23,000    $ 7,178,000   $ 129,000   $16,973,000   $(120,000)
                                                       =========    ===========   =========   ===========   ==========
<CAPTION>


                                                         Accumulated
                                                            Other
                                                        Comprehensive
                                                       Income (Deficit)      Other           Total
                                                       ----------------      -----           -----


<S>                                                    <C>                 <C>            <C>
Balance December 31, 1996                              $       (11,000)    $ (26,000)     $22,029,000

Net Income                                                                                  1,956,000
Other comprehensive income                                      49,000                         49,000
                                                                                          -----------
Total comprehensive income                                                                  2,005,000
Principal payments on ESOP loan                                               26,000           26,000
Cash dividends declared on common stock                                                      (983,000)
Purchase of stock for treasury, 1,700 shares at                                               (20,000)
$11.69 per share
Compensatory employee stock options:
    Recognized                                                                                 36,000
    Exercised or expired                                                                       42,000
                                                       ---------------     ---------      -----------
Balance December 31, 1997                                       38,000             -       23,135,000

Net Income                                                                                  2,010,000
Other comprehensive income                                     255,000                        255,000
                                                                                          -----------
Total comprehensive income                                                                  2,265,000
Cash dividends declared on common stock                                                    (1,080,000)
Purchase of stock for treasury, 1,046 shares at                                               (16,000)
$15.00 per share
Exercise of non-compensatory stock options                                                     97,000
Compensatory employee stock options:
    Recognized                                                                                 (1,000)
                                                       ---------------     ---------      ------------
Balance December 31, 1998                                      293,000             -       24,400,000

Net Income                                                                                  1,107,000
Other comprehensive loss                                    (1,151,000)                    (1,151,000)
                                                                                          ------------
Total comprehensive loss                                                                      (44,000)
Cash dividends declared on common stock                                                    (1,109,000)
Exercise of non-compensatory stock options                                                     78,000
Compensatory employee stock options:
    Exercised or expired                                                                            -
                                                       ---------------     ---------      -----------
Balance December 31, 1999                              $      (858,000)    $       -      $23,325,000
                                                       ================    =========      ===========
</TABLE>









                 See Notes to Consolidated Financial Statements


                                       32

<PAGE>   33


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES                                               1999             1998              1997
                                                                                   ----             ----              ----
<S>                                                                           <C>              <C>              <C>
    Net Income                                                                $   1,107,000    $   2,010,000    $   1,956,000
    Adjustments to reconcile net income to net cash provided by (used in)
       operating activities:
          Compensatory employee stock options recognized                                  -           (1,000)          36,000
          Provision for loan losses                                                 464,000          315,000          192,000
          Provision for depreciation and amortization                             1,337,000          791,000          476,000
          Amortization of premiums and (accretion of
          discounts) on
              Investment securities, net                                             67,000          (92,000)        (112,000)
               Gain on sale of loans held for sale                                (414,000)        (443,000)         (65,000)
               Gain on sale of finance subsidiary loan portfolio                  (144,000)               -                -
               Gain on sale of securities available for sale                       (69,000)               -                -
               Loss on sale of property and equipment                               23,000                -                -
          Loans originated for sale                                             (23,999,000)     (34,938,000)     (11,372,000)
          Proceeds from the sale of loans held for sale                          28,004,000       30,127,000       10,654,000
          Change in assets and liabilities:
              (Increase) decrease in accrued interest receivable                   (120,000)          62,000            2,000
              (Increase) decrease in other assets                                   (45,000)        (845,000)         565,000
              (Decrease) increase in accrued interest and other liabilities      (1,092,000)         209,000           34,000
                                                                              --------------   -------------    -------------

          Net cash provided by (used in) operating activities                     5,119,000       (2,805,000)       2,366,000
                                                                              -------------    --------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Decrease (increase) in federal funds sold,
    interest-bearing deposits and other short-term investments, net              24,496,000       (4,796,000)      (4,212,000)
       Proceeds from maturities and calls of Securities
       available-for-sale                                                         7,998,000       22,798,000        7,824,000
       Proceeds from maturities and calls of Securities held-to-maturity          8,840,000       13,248,000       20,723,000
       Purchases of securities available-for-sale                               (25,513,000)     (28,892,000)      (6,242,000)
       Purchases of securities held-to-maturity                                  (9,055,000)      (4,831,000)     (21,139,000)
    Proceeds from the sale of securities available-for-sale                         229,000                -                -
    Net cash used in acquisitions                                                         -       (7,140,000)        (444,000)
    Proceeds from the sale of finance subsidiary loan
    portfolio                                                                     1,383,000                -                -
    Loans originated, net of principal collected                                (15,860,000)       5,499,000       (1,077,000)
    Proceeds from sale of property and equipment                                     52,000                -                -
    Purchase of bank premises and equipment                                        (660,000)        (848,000)        (298,000)
                                                                              --------------   --------------   --------------
       Net cash used in investing activities                                     (8,090,000)      (4,962,000)      (4,865,000)
                                                                              --------------   --------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net (decrease) increase in deposits                                          (7,270,000)       7,066,000       (3,253,000)
    Net increase (decrease) in short-term borrowings                             13,988,000       (7,655,000)       4,826,000
    Proceeds from long-term borrowings                                            3,500,000       10,400,000        3,500,000
    Payments on long-term borrowings                                             (3,820,000)        (127,000)        (900,000)
    Dividends paid                                                               (1,109,000)      (1,080,000)        (983,000)
    Proceeds from issuance of common stock                                           78,000           97,000           42,000
    Purchase of common stock for treasury                                                 -          (16,000)         (20,000)
                                                                              -------------    --------------   --------------
       Net cash provided by financing activities                                  5,367,000        8,685,000        3,212,000
                                                                              -------------    -------------    -------------
       Increase in cash and cash equivalents                                      2,396,000          918,000          713,000
Cash and cash equivalents:
    Beginning                                                                     9,598,000        8,680,000        7,967,000
                                                                              -------------    -------------    -------------
    Ending                                                                    $  11,994,000    $   9,598,000    $   8,680,000
                                                                              =============    =============    =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash payments for:
       Interest                                                               $  10,722,000    $   8,849,000    $   7,264,000
       Income taxes                                                                 742,000        1,016,000          341,000

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES
    Other assets acquired in settlement of loans                                    874,000          637,000          292,000
    Principal payments on ESOP loan                                                       -                -           26,000
    Purchase of net assets
       Fair value of non cash assets                                                      -       83,258,000       45,595,000
       Liabilities assumed                                                                -       78,335,000       45,451,000
</TABLE>



                                       33


                 See Notes to Consolidated Financial Statements


<PAGE>   34

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

         NATURE OF BANKING ACTIVITIES:

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

                  As of December 31, 1999 and 1998, 71% and 74%, respectively,
                  of the gross loan portfolio consisted of real estate loans on
                  real estate located in Southcentral Wisconsin and Northcentral
                  Illinois. Generally, these loans are expected to be repaid
                  from the cash flows of the borrowers and are collateralized by
                  the related property. Credit losses arising from real estate
                  lending transactions compare favorably with Blackhawk's credit
                  loss experience on its loan portfolio as a whole. However,
                  adverse changes in the local economy would have a direct
                  impact on the credit risk in the loan portfolio.

         PRINCIPLES OF CONSOLIDATION:

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

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

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

<TABLE>
<CAPTION>
                                                                     1998          1997
                                                                     ----          ----
<S>                                                              <C>           <C>
                    Net interest income:
                        Blackhawk Bancorp, Inc.                  $    8,772    $    7,588
                        First Financial Bancorp, Inc.                 1,253         1,997
                                                                 ----------    ----------
                        Total                                    $   10,025    $    9,585
                                                                 ==========    ==========
                    Net income:
                        Blackhawk Bancorp, Inc.                  $    2,010    $    1,956
                        First Financial Bancorp, Inc.            $     (530)   $     (613)
                                                                 ----------    ----------
                        Total                                    $    1,480    $    1,343
                                                                 ==========    ==========

                    Basic Earnings per share:
                        Blackhawk Bancorp, Inc.                  $     0.88    $     0.86
                        First Financial Bancorp, Inc.                 (0.24)        (0.27)
                                                                 ----------    ----------
                        Total                                    $     0.64    $     0.59
                                                                 ==========    ==========
                    Diluted earnings per share:
                        Blackhawk Bancorp, Inc.                  $     0.83    $     0.82
                        First Financial Bancorp, Inc.                 (0.22)        (0.26)
                                                                 ----------    ----------
                        Total                                    $     0.61    $     0.56
                                                                 ==========    ==========
</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.

         RECLASSIFICATIONS:

                  Certain reclassifications have been made to the 1998 and 1997
                  historical financial statements to conform to the 1999
                  presentation.

         STATEMENTS OF CASH FLOWS:

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


                                       34


<PAGE>   35

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         SECURITIES AVAILABLE-FOR-SALE:

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

         SECURITIES HELD-TO-MATURITY:

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

         LOANS:

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

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

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

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

         SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING:

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

         MORTGAGE SERVICING RIGHTS:

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

         PREMISES AND EQUIPMENT:

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


                                       35


<PAGE>   36

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999




NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         OTHER REAL ESTATE:

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

         SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

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

         TRUST ASSETS:

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

         INCOME TAXES:

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

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

         EARNINGS PER SHARE DATA:

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

         COMPREHENSIVE INCOME:

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

         FUTURE ACCOUNTING CHANGE

                  In June 1998, the Financial Accounting Standards Board (FASB)
                  issued Statement of Financial Accounting Standards (SFAS) No.
                  133, "Accounting for Derivative Instruments and Hedging
                  Activities." This statement establishes accounting and
                  reporting standards for derivative instruments and for hedging
                  activities. This statement requires an entity to recognize all
                  derivatives as either assets or liabilities in the balance
                  sheet and measure those instruments at fair value. The
                  accounting for changes in the fair value of a derivative
                  depends on the intended use of the derivative and the
                  resulting designation. This statement is effective for fiscal
                  years beginning after June 15, 2000. Management, at this time,
                  cannot determine the effect adoption of this statement may
                  have on the consolidated financial statements of the Company
                  as the accounting for derivatives is dependent on the amount
                  and nature of derivatives in place at the time of adoption.

NOTE 2.  RESTRICTIONS ON CASH AND CASH EQUIVALENT

                  Cash and cash equivalents in the amount of $500,000 were
                  restricted at December 31, 1999 and 1998, to meet the reserve
                  requirements of the Federal Reserve System.

NOTE 3.  SECURITIES

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



                                       36


<PAGE>   37

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

NOTE 3.  SECURITIES (CONTINUED)

         AVAILABLE-FOR-SALE SECURITIES:

<TABLE>
<CAPTION>
                                                                                  1999
                                                                       Gross         Gross Unrealized        Estimated
                                                Amortized Cost    Unrealized Gains       (Losses)           Fair Value
                                                --------------    ----------------       --------           ----------
<S>                                           <C>                 <C>               <C>                  <C>
  U.S. Treasury Securities                    $     250,000       $         -       $      (4,000)       $     246,000
  U.S. Government Agencies                       36,664,000                 -          (1,128,000)          35,536,000
  Mortgage-backed securities                      7,372,000            13,000            (176,000)           7,209,000
     Obligations of states and political
       subdivisions                                 155,000                 -                   -              155,000
  Corporate Securities                            3,999,000                 -            (135,000)           3,864,000
  Mutual funds and equity securities              2,001,000            71,000             (11,000)           2,061,000
                                              -------------       -----------             --------       -------------
     Total                                    $  50,441,000       $    84,000         $(1,454,000)       $  49,071,000
                                              =============       ===========         ============       =============
<CAPTION>

                                                                                  1998
                                                                  Gross Unrealized   Gross Unrealized        Estimated
                                                Amortized Cost         Gains             (Losses)           Fair Value
                                                --------------         -----             --------           ----------
<S>                                           <C>                 <C>               <C>                  <C>
     U.S. Treasury Securities                 $     500,000       $     3,000       $           -        $     503,000
     U.S. Government Agencies                    17,456,000           197,000            (13,000)           17,640,000
     Mortgage-backed securities                   9,395,000            58,000            (33,000)            9,420,000
     Obligations of states and political
       subdivisions                                 160,000             2,000                   -              162,000
     Corporate Securities                           960,000            12,000                   -              972,000
     Mutual funds and equity securities           2,205,000            85,000             (5,000)            2,285,000
                                              -------------       -----------       -------------        -------------
         Total                                $  30,676,000       $   357,000       $    (51,000)        $  30,982,000
                                              =============       ===========       =============        =============

<CAPTION>

         HELD-TO-MATURITY SECURITIES:
                                                                                  1999
                                                                  Gross Unrealized   Gross Unrealized        Estimated
                                                Amortized Cost         Gains             (Losses)           Fair Value
                                                --------------         -----             --------           ----------
<S>                                           <C>                 <C>               <C>                  <C>
     U.S. Treasury Securities                 $   2,000,000       $     3,000       $           -        $   2,003,000
     U.S. Government Agencies                       500,000                 -            (13,000)              487,000
     Mortgage-backed securities                   4,725,000                 -           (135,000)            4,590,000
     Obligations of states and political
       subdivisions                              12,471,000            10,000           (188,000)           12,293,000
                                              -------------       -----------       -------------        -------------
         Total                                $  19,696,000       $    13,000       $   (336,000)        $  19,373,000
                                              =============       ===========       =============        =============

<CAPTION>

                                                                                  1998
                                                                       Gross         Gross Unrealized        Estimated
                                                Amortized Cost    Unrealized Gains       (Losses)           Fair Value
                                                --------------    ----------------       --------           ----------
<S>                                           <C>                 <C>               <C>                  <C>
     U.S. Treasury Securities                 $   4,997,000       $    61,000       $           -        $   5,058,000
     U.S. Government Agencies                     3,849,000             5,000                   -            3,854,000
     Mortgage-backed securities                   5,025,000            28,000            (12,000)            5,041,000
     Obligations of states and political
       subdivisions                               8,025,000           112,000             (2,000)            8,135,000
                                              -------------       -----------       -------------        -------------
         Total                                $  21,896,000       $   206,000       $    (14,000)        $  22,088,000
                                              =============       ===========       =============        =============
</TABLE>


         The amortized cost and fair value of securities as of December 31,
         1999, by contractual maturity, are shown below. Maturities may differ
         from contractual maturities in mortgage-backed securities because the
         mortgages underlying the securities may be called or prepaid without
         any penalties. Therefore, these securities are not included in the
         maturity categories in the following maturity summary:

<TABLE>
<CAPTION>
                                                       Available-For-Sale                      Held-to-Maturity
                                              ----------------------------------    ----------------------------------
                                                                     Estimated                             Estimated
                                               Amortized Cost       Fair Value       Amortized Cost        Fair Value
                                              ----------------    --------------    ----------------     -------------
<S>                                           <C>                 <C>               <C>                  <C>
     Due in one year or less                  $   1,502,000       $ 1,494,000       $   2,715,000        $   2,719,000
     Due after one year through five years       35,143,000        34,061,000           8,311,000            8,212,000
     Due after five years through ten years       4,423,000         4,246,000           3,945,000            3,852,000
     Mortgage-backed securities                   7,372,000         7,209,000           4,725,000            4,590,000
     Mutual funds and equity securities           2,001,000         2,061,000                   -                    -
                                              -------------       -----------       -------------        -------------
         Total                                $  50,441,000       $49,071,000       $  19,696,000        $  19,373,000
                                              =============       ===========       =============        =============
</TABLE>

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

               Realized gains and losses on sales of securities
               available-for-sale totaled $69,000 and $0, respectively in 1999.
               There were no realized gains or losses on securities
               available-for-sale for 1998 and 1997.

               Investment securities with an amortized cost of $28,447,000 in
               1999 and $19,941,000 in 1998 and a fair value of $27,697,000 in


                                       37

<PAGE>   38

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 3.  SECURITIES (CONTINUED)

               1999 and $20,059,000 in 1998, respectively, were pledged to
               secure public deposits, short-term borrowings, and other purposes
               required by law as of December 31.

NOTE 4.  LOANS

               The composition of the loan portfolio is as follows:

<TABLE>
<CAPTION>
                                                                                    1999                 1998
                                                                                    ----                 ----
<S>                                                                          <C>                  <C>
               Real estate - Mortgage                                        $ 136,944,000        $ 130,924,000
               Real estate - Construction                                        2,047,000            3,535,000
               Consumer                                                         29,224,000           26,532,000
               Commercial                                                       23,965,000           17,131,000
                                                                             -------------        -------------
               Total loans                                                   $ 192,180,000        $ 178,122,000

               Less: Allowance for loan losses                                   1,996,000            1,915,000
                     Unearned Income                                                     -              180,000
                                                                             -------------        -------------

                     Loans, net                                              $ 190,184,000        $ 176,027,000
                                                                             =============        =============

</TABLE>

               Non-performing loans include 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>
                                                                                    1999                 1998
                                                                                    ----                 ----
<S>                                                                          <C>                  <C>
               Impaired loans                                                $   1,984,000        $   2,389,000
               Non-accruing loans                                                  565,000              857,000
               Past due 90 days or more and still accruing                         529,000              240,000
                                                                             -------------        -------------
                     Total non-performing loans                              $   3,078,000        $   3,486,000
                                                                             =============        =============
</TABLE>


                The average balance of loans classified as impaired totaled
                approximately $2,716,000 and $634,000 for the years ended
                December 31, 1999 and 1998, respectively. The allowance for loan
                losses related to impaired loans amounted to approximately $0
                and $100,000 at December 31, 1999 and 1998, respectively.

                The Company has no commitments to loan additional funds to the
                borrowers of nonperforming loans for the years ended December
                31, 1999 and 1998.

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

<TABLE>
<CAPTION>
                                                                       1999             1998              1997
                                                                       ----             ----              ----
<S>                                                              <C>               <C>              <C>
               Income recognized                                 $     35,000      $     47,000     $     31,000
               Income that would have been recognized in
                   accordance with the original loan terms             73,000            76,000           77,000

               A summary of transactions in the allowance for loan losses is as
               follows:
                                                                       1999             1998              1997
                                                                       ----             ----              ----

               Balance at beginning of year                      $  1,915,000      $  1,523,000     $  1,186,000
               Acquired allowance for loan losses                           -           452,000          321,000
                                                                 ------------      ------------     ------------
               Adjusted balance at beginning of year                1,915,000         1,975,000        1,507,000
               Allowance associated with finance subsidiary
               loans sold                                             (24,000)                -                -
               Provision charged to expense                           464,000           315,000          192,000
               Loans charged-off                                     (408,000)         (395,000)        (216,000)
               Recoveries                                              49,000            20,000           40,000
                                                                 ------------      ------------     ------------

                     Balance at December 31                      $  1,996,000      $  1,915,000     $  1,523,000
                                                                 ============      ============     ============
</TABLE>
              Loans are made, in the normal course of business, to directors,
              executive officers, their immediate families and affiliated
              companies in which they are a principal shareholder (commonly
              referred to as related parties). The terms of these loans,
              including interest rates and collateral, are similar to those
              prevailing for comparable transactions and management believes
              they do not involve more than a normal risk of collectibility.
              Such direct and indirect loans are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        1999              1998
                                                                                        ----              ----
<S>                                                                                <C>              <C>
              Balance at beginning of year                                         $  3,197,000     $  2,215,000
              New loans                                                               3,488,000        5,386,000
              Principal repayments, net of advances on existing loans                (2,644,000)      (4,404,000)
                                                                                   -------------    -------------
                   Balance at December 31                                          $  4,041,000     $  3,197,000
                                                                                   ============     ============
</TABLE>




                                       38

<PAGE>   39


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

NOTE 4.  LOANS (CONTINUED)

               In addition, the Company has loan commitments to the
               aforementioned related parties of $3,303,000 and $2,754,000 as of
               December 31, 1999 and 1998, respectively.

NOTE 5.  MORTGAGE SERVICING RIGHTS:

               The unpaid principal balance of mortgage loans serviced for
               others, which are not included on the consolidated balance
               sheets, were $127,139,000 and $132,691,000 at December 31, 1999
               and 1998, respectively. The carrying value of the mortgage
               servicing rights is included with intangible assets and
               approximates fair market value at December 31, 1999 and 1998.

               The following is an analysis of the activity for mortgage
               servicing rights for the years ended December 31.

<TABLE>
<CAPTION>
                                                                                        1999             1998
                                                                                        ----             ----
<S>                                                                                <C>              <C>
              Balance at beginning of year                                         $ 1,028,000      $   545,000
              Mortgage servicing rights acquired through business combinations               -          257,000
              Fair value of servicing rights acquired in purchases                           -          208,000
              Additions of originated mortgage servicing rights                        231,000          544,000
              Amortization                                                            (201,000)        (526,000)
                                                                                   -----------      -----------
                       Balance at end of year                                      $ 1,058,000      $ 1,028,000
                                                                                   ===========      ===========
</TABLE>

NOTE 6.  PREMISES AND EQUIPMENT

               A summary of premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                                                        1999             1998
                                                                                        ----             ----
<S>                                                                                <C>              <C>
              Land and Improvements                                                $ 1,111,000      $ 1,117,000
              Buildings and Improvements                                             7,085,000        7,152,000
              Equipment                                                              4,755,000        4,472,000
              Vehicles                                                                 209,000          186,000
                                                                                   -----------      -----------

                                                                                    13,160,000       12,927,000
              Less accumulated depreciation                                          6,095,000        5,444,000
                                                                                   -----------      -----------
                   Premises and equipment, net                                     $ 7,065,000      $ 7,483,000
                                                                                   ===========      ===========
</TABLE>

                  Depreciation charged to operating expenses was $733,000,
                  $433,000, and $336,000 for the years ended December 31, 1999,
                  1998 and 1997, respectively.

NOTE 7.  DEPOSITS

                  Deposit accounts at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        1999              1998
                                                                                        ----              ----
<S>                                                                               <C>               <C>
              Non-interest-bearing demand                                         $ 30,552,000     $ 33,110,000
              Interest-bearing demand deposits                                      17,323,000       18,427,000
              Savings deposits                                                      27,902,000       30,108,000
              Money market deposits                                                 32,313,000       30,338,000
              Time deposits                                                        126,035,000      129,412,000
                                                                                  ------------     ------------
                   Total deposits                                                 $234,125,000     $241,395,000
                                                                                  ============     =============

</TABLE>

               The aggregate amount of short-term jumbo CDs, each with a minimum
               denomination of $100,000, was approximately $27,312,000 and
               $17,470,000 in 1999 and 1998, respectively. Interest expense on
               time deposits of $100,000 or more was approximately $1,263,000,
               $724,000 and $389,000 for the years ended December 31, 1999, 1998
               and 1997, respectively.

               At December 31, 1999, the scheduled maturities of CDs are as
               follows:

<TABLE>
<S>                        <C>                                                     <C>
                           2000                                                    $ 86,097,000
                           2001                                                      28,340,000
                           2002                                                       8,012,000
                           2003                                                       2,554,000
                           2004 and thereafter                                        1,032,000
                                                                                   ------------
                               Total certificates of deposit                       $126,035,000
                                                                                   ============
</TABLE>

NOTE 8.       BORROWED FUNDS

                  A summary of borrowed funds is as follows:

<TABLE>
<CAPTION>
                                                                                        1999             1998
                                                                                        ----             ----
<S>                                                                                <C>             <C>
             Federal funds purchased                                               $  4,400,000    $          -
             Federal Home Loan Bank of Chicago open line of credit                   10,000,000               -
             Securities sold under an agreement to repurchase                         4,164,000       4,576,000
                                                                                   ------------    ------------
                      Total short-term borrowings                                  $ 18,564,000    $  4,576,000
</TABLE>

                                       39
<PAGE>   40

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 8.      BORROWED FUNDS (CONTINUED)

<TABLE>
<S>                                                                                <C>             <C>
             Term Loan                                                             $  7,153,000    $  7,673,000
             Secured Advances from Federal Home Loan Bank of Chicago:
                 Fixed rate of 5.44%, due 1/10/99                                             -         800,000
                 Fixed rate of 7.12%, due 4/17/00                                       150,000         150,000
                 Fixed rate of 5.80% due 8/28/00                                      2,000,000               -
                 Fixed rate of 5.71%, due 6/18/02                                     2,000,000       2,000,000
                 Fixed rate of 5.20%, due 12/11/02, callable 12/11/99                         -       1,500,000
                 Fixed rate of 5.63% due 12/13/04, callable 12/13/00                  1,500,000               -
                 Fixed rate of 4.70% due 1/15/08, callable 1/15/99                            -       1,000,000
                 Fixed rate of 5.30% due 1/16/08, callable 1/16/03                    4,000,000       4,000,000
                                                                                   ------------    ------------
                      Total long-term borrowings                                   $ 16,803,000    $ 17,123,000

                      Total borrowings                                             $ 35,367,000    $ 21,699,000
                                                                                   ============    ============
</TABLE>



               The scheduled principal maturities of borrowed funds at December
               31, 1999 are as follows:

<TABLE>
<S>                                                                               <C>
                           2000                                                   $ 20,714,000
                           2001                                                              -
                           2002                                                      2,000,000
                           2003                                                      7,153,000
                           2004 and thereafter                                       5,500,000
                                                                                  ------------
                                 Total borrowings                                 $ 35,367,000
                                                                                  ============
</TABLE>

               The term loan consists of a $5,353,000 loan with a fixed interest
               rate of 6.60% and a variable portion of $1,800,000 with a current
               rate of 7.96%. The loan requires quarterly principal and interest
               payments of $225,000 on the fixed portion and quarterly interest
               only payments on the variable portion. The total loan matures
               August 21, 2003. Collateral for this loan consists of the stock
               of the Bank.

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

               The Federal Home Loan Bank Open Line of Credit is an overnight
               line of credit with rates determined daily. At December 31, 1999,
               the rate was 4.74% All advances from the Federal Home Loan Bank
               of Chicago, both term and open line of credit, are collateralized
               by substantially all one-to-four family real estate loans and
               Federal Home Loan Bank stock.

NOTE 9.  EMPLOYEE BENEFIT PLANS

         PENSION AND 401(K) PLANS:

               Blackhawk had a noncontributory, defined contribution
               money-purchase pension plan covering substantially all of its
               employees until January 1, 1999. Blackhawk contributed, on behalf
               of the eligible employees, 4.2% of total annual compensation plus
               4.2% of compensation in excess of $13,200. Effective January 1,
               1999, Blackhawk amended and restated its pension plan to a
               profit-sharing plan with a 401(k) provision. Rochelle and
               Belvidere had existing profit-sharing plans, which meet the
               qualifications of Section 401(k) of the Internal Revenue Code
               (Code). Effective January 1, 1999 both of these plans were
               amended and merged into Blackhawk's plan that went into effect
               January 1, 1999. Under the amended plans, eligible employees are
               allowed to make voluntary contributions to the plan. Blackhawk
               makes a matching contribution of 25% of the first 6% of an
               employee's compensation that they voluntarily contribute.
               Additionally, Blackhawk may make a discretionary profit sharing
               contribution. The total expenses for these plans were $146,000,
               $135,000 and $114,000 for the years ended December 31, 1999, 1998
               and 1997, respectively.

         EXECUTIVE BONUS PLAN:

               The Company has adopted a revised incentive bonus plan for
               officers providing cash bonuses based upon the financial
               performance of the Company and performance of the respective
               officers. Bonus compensation expense was $32,000, $92,000 and
               $127,000 for the years 1999, 1998 and 1997, respectively.

         STOCK OPTION PLANS:

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


                                       40

<PAGE>   41

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999



NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>

                                                    Weighted                      Weighted                      Weighted
                                                     Average                      Average                        Average
                                       1999           Price          1998           Price          1997           Price
                                       ----           -----          ----           -----          ----           -----
<S>                               <C>             <C>            <C>            <C>            <C>            <C>
      Shares under option,
          beginning of year          334,132      $     8.98       295,576      $    7.59        275,776      $    7.02
      Granted during the year         25,500           13.75        60,850          15.00         31,350          11.40
      Terminated and canceled
          during the year           (12,333)           13.73       (5,335)          11.38        (1,000)          11.25
      Exercised during the year     (11,300)            6.86      (16,959)           5.74       (10,550)           3.92
                                  ----------      ----------     ---------      ---------      ---------      ---------
      Shares under option,
          end of year                335,999            9.24       334,132      $    8.98        295,576      $    7.59
                                  ==========      ==========     =========      =========      =========      =========
      Options exercisable,
          end of year                270,150            8.02       252,948      $    7.32        217,592      $    6.57
                                  ==========      ==========     =========      =========      =========      =========
      Available to grant,
          end of year                312,650                       338,150                        84,000
                                  ==========                     =========                     =========
      Weighted average fair
       value of options granted
       during the year                            $     1.19                    $    1.34                     $    5.74
                                                  ==========                    =========                     =========
</TABLE>

     Compensation expense related to granting compensatory employee stock
     options totaled $0, ($1,000), and $36,000 in 1999, 1998 and 1997,
     respectively.

<TABLE>
<CAPTION>
                                                 Outstanding Options                    Vested Options
                        Year of               Outstanding        Weighted                          Weighted
                      Expiration             Shares Granted    Average Price   Shares Vested     Average Price
                      ----------             --------------    -------------   -------------     -------------
<S>                                             <C>            <C>                <C>          <C>
                         2000                     4,200        $    3.33            4,200      $     3.33
                         2001                    14,150             3.50           14,150            3.16
                         2002                     5,250             4.33            5,250            4.33
                         2003                    88,749             5.28           88,749            5.26
                         2004                     7,350             6.83            7,350            6.83
                         2005                   106,300             9.37          106,300            9.37
                         2006                    16,300            11.20           16,300           11.20
                         2007                    15,350            11.43           10,233           11.43
                         2008                    52,850            15.05           17,617           15.05
                         2009                    25,500            13.75                -               -
                                          -------------        ---------      -----------      ----------
                            Total               335,999        $    9.24          270,150      $     8.02
                                          =============        =========      ===========      ==========
</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>
                                                            1999                 1998               1997
                                                            ----                 ----               ----
<S>                                                  <C>                  <C>                 <C>
                   Net Income:
                       As reported                   $   1,107,000        $   2,010,000       $  1,956,000
                       Pro Forma                     $   1,049,000            1,898,000          1,862,000
                   Earnings Per Share:
                       As reported:
                          Basic                      $       0.48         $       0.88        $       0.86
                                                     ============         ============        ============
                          Diluted                    $       0.46         $       0.83        $       0.82
                                                     ============         ============        ============
                       Pro Forma:
                          Basic                      $       0.45         $       0.85        $       0.82
                                                     ============         ============        ============
                          Diluted                    $       0.43         $       0.80        $       0.78
                                                     ============         ============        ============
</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>
                                                            1999            1998             1997
                                                            ----            ----             ----
<S>                                                       <C>            <C>              <C>
                              Risk-free interest rate           5%             5%               5%
                              Expected Life               10 years       10 years         10 years
                              Expected Volatility              17%            17%              29%
                              Expected Dividend Yield           3%             3%               3%
</TABLE>

         EMPLOYEE STOCK OWNERSHIP PLAN:

             The Company has an Employee Stock Ownership Plan for the benefit of
             employees who meet the eligibility requirements. The Plan was
             established in 1990. The Plan held 77,530 shares of the Company's
             common stock, as of December 31, 1999, 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 had 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



                                       41

<PAGE>   42

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

             amounts sufficient for it to satisfy the debt service requirements.
             Accordingly, the debt has been recorded in the accompanying
             consolidated balance sheets together with the related deferred
             compensation. The debt and deferred compensation are reduced as the
             Plan makes principal payments.

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

             Cash payments to the Plan during the years ended December 31, 1999,
             1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                                                  1999            1998            1997
                                                                  ----            ----            ----
<S>                                                           <C>            <C>             <C>
                              Contributions                   $        -     $   27,000      $  24,000
                              Dividends                           38,000         38,000         38,000
                                                              ----------     ----------      ---------

                                    Total                     $   38,000     $   65,000      $  62,000
                                                              ==========     ==========      =========
</TABLE>

             For financial statement purposes, expense for the Plan is
             determined based on the percentage of shares allocated to
             participants each period (allocations are based on principal and
             interest payments) times the original amount of the debt plus the
             interest incurred. The components of the amount charged to expense
             for the years ended December 31, 1999, 1998 and 1997 are as
             follows:

<TABLE>
<CAPTION>
                                                                  1999            1998            1997
                                                                  ----            ----            ----
<S>                                                           <C>            <C>              <C>
                              Compensation                    $        -     $   27,000       $  24,000
                                                                             -
                              Interest                                 -              -               -
                                                              ----------     ----------       ---------

                                     Total                    $        -     $   27,000       $  24,000
                                                              ==========     ==========       =========
</TABLE>

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

         DEFERRED COMPENSATION PLAN:

             As a result of acquisitions, Blackhawk assumed deferred
             compensation agreements with certain officers of Rochelle and
             Belvidere. Amounts are accumulated in an account from which
             benefits will be paid to the officers at termination or retirement.
             As of December 31, 1999 and 1998 deferred compensation liability
             totaled $296,000 and $273,000, respectively.

             The agreements also provide for an acceleration of benefits upon
             the deaths of these officers, payable to their beneficiaries.
             Blackhawk has purchased life insurance policies on the lives of the
             officers in order to fund the acceleration of benefits at death.
             Blackhawk is owner and beneficiary of these policies which provide
             for death benefits totaling $1,307,000 and $1,307,000 as of
             December 31, 1999 and 1998, respectively. These policies have a
             cash surrender value of $596,000 and $583,000 as of December 31,
             1999 and 1998.

NOTE 10. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                     1999                1998
                                                                                     ----                ----
<S>                                                                           <C>                 <C>
                     Deferred Tax Liabilities:
                          Property and Equipment                              $   (444,000)       $   (473,000)
                          Unrealized gains on securities available-for-sale              -             (75,000)
                          Purchase Accounting                                     (410,000)           (525,000)
                          Mortgage Servicing Rights                               (303,000)           (342,000)
                          Other                                                    (68,000)            (89,000)
                                                                              -------------       -------------
                              Total Deferred Tax Liabilities                    (1,225,000)         (1,504,000)
                                                                              -------------       -------------

                     Deferred Tax Assets:
                          Reserve for loan losses                                  756,000             706,000
                          Accrued liabilities                                      341,000             538,000
                          State net operating loss carryovers                       40,000              58,000
                          Unrealized losses on securities available-for-sale       512,000                   -
                                                                              ------------        ------------
                              Total Deferred Tax Assets                          1,649,000           1,302,000
                                                                              ------------        ------------

                              Net Deferred Tax Assets (Liabilities)           $    424,000        $   (202,000)
                                                                              ============        =============
</TABLE>

             The provision for income taxes consists of the following:



                                       42
<PAGE>   43

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 10. INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
                                                                1999                1998                1997
                                                                ----                ----                ----
<S>                                                     <C>                   <C>                <C>
                     Current tax expense:
                          Federal                       $     506,000         $    989,000       $     957,000
                          State                                27,000              225,000             129,000
                                                        -------------         ------------       -------------

                              Total Current                   533,000            1,214,000           1,086,000
                                                        -------------         ------------       -------------

                     Deferred tax provision (credit):
                          Federal                             (38,000)              28,000            (13,000)
                          State                                (1,000)            (53,000)             (6,000)
                                                        --------------        ------------       -------------

                              Total Deferred                  (39,000)            (25,000)            (19,000)
                                                        --------------        ------------       -------------

                              Total provision for
                              income taxes              $     494,000         $  1,189,000       $   1,067,000
                                                        =============         ============       =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   1999                1998               1997
                                                                   ----                ----               ----
<S>                                                          <C>                <C>                 <C>
                  Tax expense at statutory rate              $    544,000       $  1,088,000        $ 1,028,000
                  Increase (decrease) in taxes resulting
                  from:
                       Tax exempt interest                       (166,000)           (89,000)           (59,000)
                       State income taxes, net of federal
                         tax benefit                               17,000            114,000             76,000
                       Amortization of goodwill and other
                         intangibles                              205,000            122,000             62,000
                       Other                                     (106,000)           (46,000)           (40,000)
                                                             -------------      -------------       ------------
                  Provision for income taxes                 $    494,000       $  1,189,000        $ 1,067,000
                                                             ============       ============        ===========
</TABLE>


NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                                   1999                1998               1997
                                                                   ----                ----               ----
<S>                                                          <C>                <C>                 <C>
                  Accumulated other comprehensive income
                  at beginning                               $    293,000       $     38,000        $   (11,000)
                                                             ------------       ------------        ------------
                  Activity:
                      Unrealized gain on securities
                      available for sale                       (1,607,000)           398,000             74,000
                      Tax impact                                  498,000           (143,000)           (25,000)
                                                             ------------       -------------       ------------
                  Net unrealized gain (loss) on securities
                  available for sale                           (1,151,000)           255,000             49,000
                                                             ------------       ------------        -----------
                      Reclassification adjustment for
                        realized gains on securities
                        available-for-sale                        (69,000)                 -                  -
                      Tax impact                                   27,000                  -                  -
                                                             ------------       ------------        -----------
                  Net reclassification adjustment                 (42,000)                 -                  -
                                                             ------------       ------------        ----------
                  Other comprehensive income (loss)            (1,151,000)           255,000             49,000
                                                             ------------       ------------        -----------
                  Accumulated other comprehensive income
                  (deficit) at end                           $   (858,000)      $    293,000        $    38,000
                                                             =============      ============        ===========
</TABLE>


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

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

              The Company's exposure to credit loss in the event of
              nonperformance by the other party to the financial instrument for
              commitments to extend credit and standby letters of credit is
              represented by the contractual amount of those instruments. The
              Company uses the same credit policies in making commitments as it
              does for on-balance-sheet instruments.

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


                                       43
<PAGE>   44


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


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

              A summary of the amount of Company's exposure to credit loss for
              loan commitments (unfunded loans and unused lines of credit) and
              standby letters of credit outstanding at December 31, 1999 and
              1998 was as follows:

<TABLE>
<CAPTION>
                                                                                    1999                 1998
                                                                                    ----                 ----
<S>                                                                          <C>                  <C>
                    Loan Commitments                                         $  29,314,000        $  40,213,000

                    Standby Letters of Credit                                $     723,000        $     161,000

                    Commitments to Sell                                      $    540,000         $   6,675,000
</TABLE>

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

NOTE 13. LEASE COMMITMENTS

              The Bank leases two branch office locations in Beloit, Wisconsin.
              The first is currently month-to-month and the other expires in
              July 2002. The leases can be renewed for an additional five years.
              Should the Bank not renew the leases, it 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, 2010
              and 2012, respectively. The lease that expired in November 1999
              has been extended on a month-to-month basis with a 120-day notice
              of termination by either party.

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

              The Bank leases an administration office in Belvidere, Illinois
              under a lease expiring in April 2000.

              The total minimum rental commitment under the leases at December
              31, 1999 is as follows:

<TABLE>
<CAPTION>
                         Year Ending December 31:

<S>                                  <C>                <C>
                                     2000               $   79,000
                                     2001                   65,000
                                     2002                   54,000
                                                        ----------

                                     Total              $  198,000
                                                        ==========
</TABLE>

              Total rent expense for the years ended December 31, 1999, 1998 and
              1997 was $108,000, $92,000, and $49,000, respectively.

NOTE 14. EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

                                                                   Income                Share           Per Share
                                                                (Numerator)          (Denominator)        Amount
                                                                -----------          -------------        ------
<S>                                                         <C>                       <C>              <C>
                  For the Year Ended December 31, 1999
                  Basic Earnings Per Share                  $     1,107,000           2,309,345        $    0.48
                                                            ===============                            =========
                  Effect of Dilutive Stock Options                                      112,641
                                                                                  -------------
                  Diluted Earnings Per Share                $     1,107,000           2,422,076        $    0.46
                                                            ===============       =============        =========

                  For the Year Ended December 31, 1998
                  Basic Earnings Per Share                  $     2,010,000           2,296,636        $    0.88
                                                            ===============                            =========
                  Effect of Dilutive Stock Options                                      120,283
                                                                                  -------------
                  Diluted Earnings Per Share                $     2,010,000           2,416,919        $    0.83
                                                            ===============       =============        =========

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




                                       44
<PAGE>   45


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 15. SEGMENT INFORMATION

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

NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS

              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, interest-bearing deposit accounts 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.

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

<TABLE>
<CAPTION>
                                                    December 31, 1999                     December 31, 1998
                                                    -----------------                     -----------------
                                               Carrying                              Carrying
                                                Amount          Fair Value            Amount            Fair Value
                                                ------          ----------            ------            ----------
<S>                                         <C>             <C>                 <C>                 <C>
          Financial Assets
              Cash, cash equivalents        $ 11,994,000    $  11,994,000       $   9,598,000       $   9,598,000
              Interest-bearing deposit         4,616,000        4,616,000           6,375,000           6,375,000
          accounts
              Federal funds sold and other
                 Short-term investments           91,000           91,000          22,828,000          22,828,000
              Securities                      68,767,000       68,444,000          52,572,000          53,072,000
              Loans held for sale                540,000          540,000           4,362,000           4,362,000
              Loans, net of allowance for
                 Loan losses                 190,184,000      190,723,000         176,027,000         179,138,000

          Financial Liabilities
              Demand deposit and savings    $108,090,000    $ 108,090,000       $ 112,157,000       $ 112,157,000
              Time deposits                  126,035,000      125,633,000         129,238,000         133,194,000
              Borrowings                      35,367,000       35,293,000          21,699,000          21,396,000
</TABLE>

                  Limitations: Fair value estimates are made at a specific point
                  in time based on relevant market information and information
                  about the financial instrument. These estimates do not reflect
                  any premium or discount that could result from offering for
                  sale at one time the Company's entire holdings of a particular
                  instrument. Because no market exists for a significant portion
                  of the Company's financial instruments, fair value estimates
                  are based on judgments regarding future expected loss
                  experience, current economic conditions, risk characteristics
                  of various financial instruments, and other factors. These
                  estimates are subjective in nature and involve uncertainties
                  and matters that could affect the estimates. Fair value
                  estimates are based on existing on-and off-balance-sheet
                  financial instruments without attempting to estimate the value
                  of anticipated future business and the value of assets and
                  liabilities that are not considered financial instruments.
                  Deposits with no stated maturities are defined as having a
                  fair value equivalent to the amount payable on demand. This
                  prohibits adjusting fair value derived from retaining those
                  deposits for an expected future period of time. This
                  component, commonly referred to as a deposit base intangible,
                  is neither considered in the above amounts nor is it recorded
                  as an intangible asset on the balance sheet. Significant
                  assets and liabilities that are not considered financial
                  assets and liabilities include premises and equipment. In
                  addition, the tax ramifications related to the realization of
                  the unrealized gains and losses can have a significant effect
                  on fair value estimates and have not been considered in the
                  estimates. With respect to off-balance sheet instruments, the
                  amounts were deemed immaterial and therefore no fair values
                  are presented.



                                       45


<PAGE>   46

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999



NOTE 17. REGULATORY MATTERS

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

              Quantitative measures established by regulation to ensure capital
              adequacy require the Company and the Bank to maintain minimum
              amounts and ratios (set forth in the table below) of total capital
              and Tier I capital (as defined in the regulations) to
              risk-weighted assets (as defined), and the Tier I capital (as
              defined) to average assets (as defined). Management believes, as
              of December 31, 1999, that the Company and the Bank meet all
              capital adequacy requirements to which it is subject.

              As of December 31, 1999, the most recent notification from the
              FDIC categorized the Bank as well capitalized under the regulatory
              framework for prompt corrective action. To be categorized as well
              capitalized, the Company and the Bank must maintain minimum total
              risk-based, Tier I risk-based, and Tier I leverage ratios as set
              forth in the table. There are no conditions or events since that
              notification that management believe have changed the Company and
              the Bank's category.

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

<TABLE>
<CAPTION>
                                                                                               To be Well Capitalized
                                                                                                    Under prompt
                                                                             For Capital              Corrective
                                                     Actual               Adequacy Purposes        Action Provisions
                                                    --------             -------------------    ---------------------
         As of December 31, 1999:             Amount        Ratio         Amount       Ratio       Amount      Ratio
                                              ------        -----         ------       -----       ------      -----
<S>                                         <C>             <C>        <C>             <C>         <C>         <C>
         Company
             Total Capital (To Risk
                Weighted Assets)            $  19,647       10.61%     $   14,819        8.0%
             Tier I Capital (To Risk
                Weighted Assets)               17,625        9.52%          7,410        4.0%
             Tier I Capital (To
                Average Assets)                17,625        6.10%          8,665        3.0%
         Bank
             Total Capital (To Risk
                Weighted Assets)            $  26,476       14.25%     $   15,357        8.0%    $  19,196      10.0%
             Tier I Capital (To Risk
                Weighted Assets)               24,454       13.17%          7,678        4.0%       11,518       6.0%
             Tier I Capital (To
                Average Assets)                24,454        8.48%         11,572        4.0%       14,464       5.0%

         As of December 31, 1998:

         Company
             Total Capital (To Risk
                Weighted Assets)            $  18,746        9.31%     $   16,111        8.0%
             Tier I Capital (To Risk
                Weighted Assets)               16,830        8.36%          8,055        4.0%
             Tier I Capital (To
                Average Assets)                16,830        6.00%          8,744        3.0%
         Bank
             Total Capital (To Risk
                Weighted Assets)            $  25,704       12.79%     $   16,075        8.0%    $  20,093     10.0%
             Tier I Capital (To Risk
                Weighted Assets)               23,788       11.84%          8,037        4.0%       12,056      6.0%
             Tier I Capital (To
                Average Assets)                23,788        8.50%         11,488        4.0%       14,360      5.0%
</TABLE>

                                       46

<PAGE>   47

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999


NOTE 18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

         CONDENSED PARENT COMPANY BALANCE SHEETS:

<TABLE>
<CAPTION>

                                                                                1999             1998
                                                                                ----             ----
<S>                                                                        <C>              <C>
              ASSETS
                  Cash and cash equivalents                                $    37,000      $   791,000
                  Short-term investments                                         5,000                -
                  Investment securities available-for-sale                           -          189,000
                  Investment in subsidiaries                                30,154,000       31,212,000
                  Due from subsidiaries, net                                   231,000          105,000
                  Other assets                                                 402,000          156,000
                                                                           -----------      -----------

                      Total Assets                                         $30,829,000      $32,453,000
                                                                           ===========      ===========

              LIABILITIES AND SHAREHOLDERS' EQUITY
                  Liabilities:
                      Other borrowings                                     $ 7,153,000      $ 7,673,000
                      Other liabilities                                        351,000          380,000
                                                                           -----------      -----------

                   Total Liabilities                                         7,504,000        8,053,000
                                                                           -----------      -----------
                  Shareholders' Equity:
                      Preferred Stock                                                -                -
                      Common Stock                                              23,000           23,000
                      Additional paid in capital                             7,307,000        7,229,000
                      Retained earnings                                     16,973,000       16,975,000
                      Less treasury stock, at cost                            (120,000)        (120,000)
                      Accumulated other comprehensive income                  (858,000)         293,000
                                                                           -----------      -----------

                      Total Shareholders' Equity                            23,325,000       24,400,000
                                                                           -----------      -----------

                      Total liabilities and shareholders' equity           $30,829,000      $32,453,000
                                                                           ===========      ===========
</TABLE>

         CONDENSED PARENT COMPANY STATEMENTS OF INCOME:

<TABLE>
<CAPTION>
                                                                        1999              1998              1997
                                                                        ----              ----              ----
<S>                                                               <C>                <C>              <C>
                   Income:
                      Dividends from subsidiaries                 $  1,450,000       $ 1,800,000      $   1,750,000
                      Gain on sale of securities
                        available-for-sale                              69,000                 -                  -
                      Interest income                                   12,000            20,000             74,000
                                                                  ------------       -----------      -------------
                         Total Income                                1,531,000         1,820,000          1,824,000
                                                                  ------------       -----------      -------------
                   Expenses:
                      Interest Expense                                 503,000           169,000                  -
                      Professional fees                                 47,000            46,000             27,000
                      Other                                             68,000            44,000             44,000
                                                                  ------------       -----------      -------------
                         Total Expenses                                618,000           259,000             71,000
                                                                  ------------       -----------      -------------
                   Income before income tax benefits and equity
                     in undistributed net income of subsidiaries       913,000         1,561,000          1,753,000
                   Income tax benefit                                 (201,000)          (73,000)                 -
                                                                  ------------       -----------      -------------
                   Income before equity in undistributed net
                     income of Subsidiaries                          1,114,000         1,634,000          1,753,000
                   Equity in undistributed net income of
                     subsidiaries                                       (7,000)          376,000            203,000
                                                                  ------------       -----------      -------------

                         Net Income                               $  1,107,000       $ 2,010,000      $   1,956,000
                                                                  ============       ===========      =============
</TABLE>

         CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
                                                                        1999              1998              1997
                                                                        ----              ----              ----
<S>                                                               <C>                <C>              <C>
         Cash Flows From Operating Activities
              Net income                                          $  1,107,000       $ 2,010,000      $  1,956,000
              Adjustments to reconcile net income to net cash
                 provided by operating activities:
              Compensatory employee stock options recognized                -             (1,000)           36,000
              Amortization of intangible assets                         38,000            28,000            13,000
              Equity in undistributed net income of subsidiaries         7,000          (376,000)         (203,000)
              Gain on sale of available-for-sale securities            (69,000)                -                 -
              Decrease in due from subsidiaries                       (126,000)          650,000            44,000
              Accretion of discounts on investment securities,
                  net                                                        -                 -           (35,000)
              (Increase) decrease in other assets                     (300,000)         (745,000)           39,000
              (Decrease) increase in other liabilities                 (29,000)           25,000            31,000
                                                                  -------------      -----------      ------------
              Net cash provided by operating activities                628,000         1,591,000         1,881,000
                                                                  ============       ===========      ============
</TABLE>

                                       47

<PAGE>   48

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999



         CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS: (CONTINUED)


<TABLE>
<CAPTION>
                                                                        1999              1998              1997
                                                                        ----              ----              ----
<S>                                                               <C>                <C>              <C>
         Cash Flows From Investing Activities
              Net increase in short-term investments                   (5,000)                 -                 -
              Purchase of securities                                         -                 -       (4,967,000)
              Proceeds from maturity of securities                           -           110,000         7,090,000
              Proceeds from the sales of securities                    174,000                 -                 -
              Payments for investments in subsidiary                         -       (12,636,000)       (4,233,000)
              Repayment of investments in subsidiaries                       -         4,915,000                 -
                                                                  ------------       -----------      ------------
                  Net cash provided by (used in) investing
                  activities                                           169,000        (7,611,000)       (2,110,000)
                                                                  ------------       ------------     -------------
         Cash Flows From Financing Activities
              Proceeds from long-term debt                                   -         7,800,000                 -
              Repayment of long-term debt                             (520,000)         (127,000)                -
              Dividends paid                                        (1,109,000)       (1,080,000)         (983,000)
              Proceeds from sale of common stock                        78,000            98,000            42,000
              Purchase of common stock for treasury                          -           (16,000)          (20,000)
                                                                  ------------       ------------     -------------
                  Net cash provided by (used in) financing
                  activities                                        (1,551,000)        6,675,000          (961,000)
                                                                  -------------      -----------      -------------
              Increase (decrease) in cash and cash equivalents        (754,000)          655,000        (1,190,000)

         Cash and Cash Equivalents:
                  Beginning                                            791,000           136,000         1,326,000
                                                                  ------------       -----------      ------------
                  Ending                                          $     37,000       $   791,000      $    136,000
                                                                  ============       ===========      ============
</TABLE>



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