BLACKHAWK BANCORP INC, DEF 14A, 1997-04-02

BLACKHAWK BANCORP INC
DEF 14A, 1997-04-02
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant [X]

Filed by a party other than the registrant [ ]

Check the appropriate box:

[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement

[ ] Definitive additional materials

[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

BLACKHAWK BANCORP, INC.
- - -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

NOT APPLICABLE
- - -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

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

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

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

(2) Form, schedule or registration statement no.:

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

(3) Filing party:

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

(4) Date filed:

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

<PAGE> 2

BLACKHAWK BANCORP, INC.

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

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
on May 14, 1997

To the shareholders of BLACKHAWK BANCORP, INC:

The 1997 annual meeting of the shareholders of Blackhawk Bancorp, Inc.
(the "Corporation") will be held on Wednesday, May 14, 1997 at 10:00 A.M.,
local time, at the Country Club of Beloit, 2327 Riverside Drive, Beloit,
Wisconsin, for the following purposes:

(1) To elect one class of four directors to serve for a term of
three years; and

(2) To transact such other business as may properly come before
the Annual Meeting or any adjournment thereof.

Only shareholders of record on the books of the Corporation at the
close of business on March 25, 1997 will be entitled to vote at the Annual
Meeting or any adjournment thereof. Your attention is called to the Proxy
Statement accompanying this notice for a more complete statement regarding the
matters to be acted upon at the Annual Meeting.

BY ORDER OF THE BOARD OF DIRECTORS

JAMES P. KELLEY
Executive Vice President and Secretary

Beloit, Wisconsin
April 2, 1997

A PROXY, WHICH IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS, IS ENCLOSED.
PLEASE INDICATE YOUR VOTING DIRECTIONS, SIGN AND DATE THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF FOR ANY REASON YOU LATER
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
<PAGE> 3

BLACKHAWK BANCORP, INC.

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

PROXY STATEMENT

===============

This Proxy Statement was first mailed to
Shareholders on or about April 2, 1997

===============

This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Blackhawk Bancorp, Inc., a Wisconsin
corporation (the "Corporation"), for the annual meeting of shareholders to be
held on Wednesday, May 14, 1997 beginning at 10:00 A.M.

Shareholders of record at the close of business on March 25, 1997 will
be entitled to one vote on each matter presented for each share so held. At
that date there were 2,291,264 shares of Common Stock outstanding and entitled
to vote at the meeting. Any shareholder entitled to vote may vote either in
person or by duly authorized proxy. Shares of the Corporation's Common Stock
represented by properly executed proxies received by the Corporation will be
voted at the meeting and any adjournment thereof in accordance with the terms
of such proxies, unless revoked. Proxies may be revoked at any time prior to
the voting thereof either by written notice filed with the secretary or the
acting secretary of the meeting or by oral notice to the presiding officer
during the meeting. The representation at the meeting in person or by proxy of
shareholders of the Corporation holding a majority of the Corporation's
outstanding shares of Common Stock shall constitute a quorum for the
transaction of business. For the purpose of determining the presence of a
quorum, shares represented on any matter will be counted as present and
represented on all matters to be acted upon, including any matter with respect
to which the holder of such shares abstain from voting, and including shares
which are not voted by a holder of record who is a broker because the broker
has not received authority from the beneficial owner, as required under
applicable laws and rules, to vote the shares on such matter ("broker
nonvotes").

Directors are elected by a plurality of the votes cast by the holders
of the Corporation's Common Stock at a meeting at which a quorum is present.
"Plurality" means that the individuals who receive the largest number of votes
cast are elected as directors up to the maximum number of directors to be
chosen at the meeting. Consequently, any shares not voted (whether by
abstention, broker nonvote or otherwise) have no impact in the election of
directors except to the extent the failure to vote for an individual results
in another individual receiving a larger number of votes. Under Wisconsin law,
votes cast "AGAINST" a director nominee are given no legal effect and are not
counted as votes cast in the election of directors. Approval of any other
matter which properly comes before the meeting will require the affirmative
vote of a majority of the shares represented at the meeting and entitled to
vote on the particular matter. In tabulating votes cast on any such other
matter, abstentions will be considered votes cast, and accordingly will have
the same effect as a negative vote. Broker nonvotes, on the other hand, will
not be counted as shares entitled to be voted on the particular matter, and
therefore will have no impact on the outcome of the vote.

Expenses in connection with the solicitation of proxies will be paid
by the Corporation. Upon request, the Corporation will reimburse brokers,
dealers, banks and voting trustees, or their nominees, for reasonable expenses
incurred in forwarding copies of the proxy material and annual report to the
beneficial owners of shares which such persons hold of record. Solicitation of
proxies will be principally by mail. Proxies may also be solicited in person,
or by telephone, by officers and regular employees of the Corporation, who will
receive no additional or special compensation for their services.
<PAGE> 4

Shares held for the accounts of participants in the Corporation's Employee
Stock Ownership Plan ("ESOP") will be voted in accordance with the instructions
of the participants or otherwise in accordance with the terms of the ESOP.

BENEFICIAL OWNERSHIP OF SECURITIES

The table below sets forth information regarding the beneficial
ownership of Common Stock of the Corporation, as of March 25, 1997, by each
director and nominee for director and by all directors and officers of the
Corporation as a group. Other than Mr. Conerton, a director and President and
Chief Executive Officer of the Corporation, no person is known to the
Corporation to be the beneficial owner of more than 5% of the outstanding
shares of the Corporation's Common Stock. Except as shown in the table, each
person's address is the same as the Corporation's: 400 Broad Street, Beloit,
Wisconsin 53511. All information has been restated as necessary to reflect the
Corporation's 1994 2- for-1 stock split effected as a 100% Common Stock
dividend (the "1994 Stock Split"), and to reflect the Corporation's 1995
3-for-2 stock split effected as a 50% Common Stock dividend (the "1995 Stock
Split").

John B. Clark 77,250 shares(5) 3.4%
c/o Everen Securities, Inc.
2021 Holiday Drive
Janesville WI 53545

Dennis M. Conerton 136,786 shares(4) 5.8%

H. Daniel Green, DDS 11,220 shares 0.5%
419 Pleasant Street
Beloit WI 53511

Charles Hart 8,650 shares 0.4%
c/o Combined Insurance Group, Ltd.
520 W. Grand Avenue
Beloit WI 53511

Kenneth A. Hendricks 67,275(5) 2.9%
c/o ABC Supply Co.
One ABC Parkway
Beloit WI 53511

James P. Kelley 98,649 shares(3)(4)(5) 4.2%

Frederick G. Klett 45,300 shares(5) 2.0%
c/o Klett Insurance and Financial Services
1239 E. Huebbe Pkwy.
Beloit WI 53511

George D. Merchant 73,575 shares(5) 3.2%
2413 Liberty Avenue
Beloit WI 53511
</TABLE>

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<PAGE> 5

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES BENEFICIALLY OWNED AND PERCENT
OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP(1)(2) OF CLASS
- - ------------------- ------------------------------ --------
<S> <C> <C>
Roger K. Taylor 54,479 shares(5) 2.4%
215 Elmwood Avenue
South Beloit IL 61080
All directors and executive officers as a group 684,890 shares(3) 27.7%
(11 persons)
</TABLE>

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

(1) Except as noted otherwise, each person holds sole voting and
dispositive powers with respect to all shares shown opposite his name.

(2) Includes options to purchase shares exercisable currently or within 60
days of the date of this Proxy Statement for each of the persons
identified in the table as follows: Calkins - 29,925; Clark - 6,300;
Conerton - 68,583; Green - 6,300; Hart - 2,100; Hendricks - 0; Kelley
- 29,925; Klett - 5,250; Merchant - 6,300; and Taylor - 6,300.

(3) Includes 5,765 shares (or approximately 0.3% of all outstanding shares
as of March 25, 1997) which are held in the trust established pursuant
to the ESOP and are not allocated to employee accounts. Under the
terms of the ESOP, Messrs. Calkins and Kelley, who serve as members of
the committee constituting the ESOP plan administrator, share voting
power with respect to these shares.

(4) Includes shares allocated to the individual's account under the
Corporation's ESOP as follows: Mr. Calkins - 10,009 shares; Mr.
Conerton - 938 shares; and Mr. Kelley - 10,459 shares.

(5) For Messrs. Clark, Calkins, Hendricks, Kelley, Klett, Merchant and
Taylor, includes 64,950 shares, 38,250 shares, 67,275 shares, 52,500
shares, 40,050 shares, 67,275 shares and 45,725 shares, respectively,
held jointly with such person's spouse.

The information presented in the table is based on information
furnished by the specified persons and was determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934 (the "1934 Act"), as required
for purposes of this Proxy Statement. Briefly stated, under that Rule shares
are deemed to be beneficially owned by any person or group having the power to
vote or direct the vote of, or the power to dispose or direct the disposition
of, such shares, or who has the right to acquire beneficial ownership thereof
within 60 days. Beneficial ownership for the purposes of this Proxy Statement
is not necessarily to be construed as an admission of beneficial ownership for
other purposes.

ELECTION OF DIRECTORS

The Corporation's Bylaws, and actions of the Board taken pursuant
thereto, provide that there shall be 10 directors divided into three classes,
as nearly equal in number as practicable, each to serve 3-year staggered terms.
At each annual meeting the term of office of one of the three classes expires,
and a new class must be elected or re-elected to serve for a term of three
years or until their successors are duly elected and qualified. Three of the
nominees for election as directors to the class of directors whose term expires
this year are presently serving as directors of the Corporation, and

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<PAGE> 6

have since its incorporation in 1989. The fourth nominee, Kenneth A.
Hendricks, was appointed to the Board in September 1997.

The Board recommends that the shareholders elect the four individuals
named below to serve as directors of the Corporation for a term of three years
or until their successors have been duly elected and qualified. Unless
otherwise directed, proxies will be voted for the election of the following
four persons. If any of the nominees should decline or be unable to act as a
director, which is not foreseen, proxies may be voted with discretionary
authority for a substitute nominee designated by the Board of Directors.

NOMINEES FOR ELECTION TO TERM EXPIRING IN 2000:

<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION(1) SINCE
------------ ----------------------- --------
<S> <C> <C>
Jesse L. Calkins, 56(2) Senior Vice President, Treasurer and Chief Financial Officer 1989
of the Corporation and Senior Vice President and Senior Trust
Officer of its subsidiary, Blackhawk State Bank.

Dennis M. Conerton, 46(2) President and Chief Executive Officer of the Corporation and 1989
of its subsidiary, Blackhawk State Bank, since February 20,
1995; prior thereto, Vice President - Controller/Chief
Accounting Officer, Regal-Beloit Corporation (manufacturer of
power transmission components and perishable cutting tools)
from May, 1978 to February, 1995; Director, North American
Tool Corporation (manufacturing), 215 Elmwood Avenue, South
Beloit, IL.

Kenneth A. Hendricks, 55 President and Chief Executive Officer of ABC Supply Co. since 1996
1982 (Roofing and Siding Wholesaler)

George D. Merchant, 63(2)(3) Retired since 1986; prior thereto, Owner/Operator of two Dairy 1989
Queen ice cream store franchises.
</TABLE>

In addition to those four persons, the following six individuals also
presently serve as directors of the Corporation for the indicated terms.

CLASS OF DIRECTORS WHOSE TERM EXPIRES IN 1999:
<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION(1) SINCE
------------ ----------------------- --------
<S> <C> <C>
John B. Clark, 54(4) Stockbroker, Everen Securities, Inc. since 1976 (formerly 1989
known as Janesville branch office of Kemper Securities Group,
Inc.) (securities investment firm); Director, Citizen National
Bancorp, 207 Wells Street, Darlington, WI.

H. Daniel Green, DDS, 62(3)(4) Dentist in private practice. 1989

Charles Hart, 63(3)(4) President and Director of Combined Insurance Group, Ltd. (full 1993
service insurance agency); Director, Hart, Kruse & Boutelle,
Inc. (real estate). Director, Beloit Memorial Hospital;
Director, Beloit 2000 Development Corporation.
</TABLE>

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<PAGE> 7

CLASS OF DIRECTORS WHOSE TERM EXPIRES IN 1998:

<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION(1) SINCE
------------ ----------------------- --------
<S> <C> <C>
James P. Kelley, 53(2) Executive Vice President and Secretary of the Corporation 1989
and Executive Vice President of its subsidiary, Blackhawk
State Bank.

Frederick G. Klett, 66(2) Sales Representative, The Prudential Life Insurance Company 1989
of America.

Roger K. Taylor, 52(2) President and Chief Executive Officer, North American Tool 1989
Corporation since 1986 (manufacturer of perishable cutting
tools).
</TABLE>

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

(1) Except as otherwise noted, all directors have been employed in the
principal occupations noted above for the past five years or more.

(2) Member of the executive committee in 1996, of which Mr. Merchant was
the chairman. The executive committee is authorized to exercise the
powers of the Board of Directors in the management of the business and
affairs of the Corporation when the Board is not in session, except
for those powers which are non-delegable by law or have been delegated
to other committees. The executive committee met three times in 1996.

(3) Member of the audit committee in 1996, of which Mr. Merchant was the
chairman. The audit committee's functions include meeting with the
Corporation's independent public accountants and making
recommendations to the Board of Directors regarding the engagement or
retention of such accountants, adoption of accounting methods and
procedures, public disclosures required to comply with securities laws
and other matters relating to the Corporation's financial accounting.
The audit committee met one time in 1996.

(4) Member of the compensation committee in 1996, of which Mr. Green was
the chairman. The compensation committee reviews and makes
recommendations with respect to the Corporation's and its subsidiary's
hiring and compensation policies, and performs administrative
functions with respect to the Corporation's 1990 and 1994 Executive
Stock Option Plans. The compensation committee met one time in 1996.

The Board of Directors held eleven meetings during 1996. Each of the
directors attended at least 75% of the meetings of the Board (including
meetings of committees of which he is a member) held during the period of 1996
for which he served as a director. There are no standing nomination or similar
committees of the Board.

The table below sets forth information with respect to persons who
served as directors or executive officers of the Corporation and/or its
subsidiary, Blackhawk State Bank (the "Bank"), during 1996, but who are not
named in the table above.

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<PAGE> 8

<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH CORPORATION AND PRINCIPAL OCCUPATION
- - ------------ --------------------------------------------------
<S> <C>
Richard J. Rusch, 52 Vice President - Commercial Lending of the Bank (1990-Present); non-
director member, executive committee of the Corporation; prior to 1990,
Vice President - Lending for M&I Marshall & Ilsley Bank of Beloit.
</TABLE>

COMPENSATION OF DIRECTORS

DIRECTORS' FEES

Directors of the Corporation who are not employees of the Corporation
or of the Bank receive an annual retainer of $7,500.00, while
employee/directors receive an annual retainer of $7,000.00. These retainers
are subject to a $100.00 deduction for each board meeting missed. The chairman
of the compensation committee and of the executive committee each receive an
additional annual retainer of $1,000.00. The Corporation has also established
stock option plans in which non-employee directors are eligible to participate.

DIRECTORS' STOCK OPTION PLANS

Prior to its expiration on January 24, 1995, the Corporation
maintained the Blackhawk Bancorp, Inc. 1990 Directors' Stock Option Plan (the
"1990 Directors' Plan"), which was intended to provide an incentive for
directors of the Corporation who are not active full-time employees of the
Corporation or of a subsidiary of the Corporation ("Outside Directors") to
improve corporate performance on a long-term basis. To replace the expired
1990 Directors' Plan, the Board of Directors adopted, and the shareholders of
the Corporation on May 11, 1994 approved, the Blackhawk Bancorp, Inc. 1994
Directors' Stock Option Plan (the "1994 Directors' Plan"), which is
substantially similar in all material respects to the 1990 Directors' Plan.
The 1994 Directors' Plan has 60,000 shares of the Corporation's Common Stock
reserved for issuance, provides for the granting of non-qualified stock options
and expires on March 9, 1999.

The 1994 Directors' Plan is administered by the entire Board of
Directors of the Corporation, although the Plan does not permit any discretion
in the Board to determine the timing of, or the persons receiving, any grants.
Rather, by its terms, the 1994 Directors' Plan establishes the persons to be
granted options, the date of grant, the option price, the number of shares
subject to such options and the time or times when each option will become
exercisable in whole or in part. Each year during the term of the 1994
Directors' Plan, each Outside Director receives an option to purchase 1,050
shares of the Corporation's Common Stock. Options are granted as of the first
business day of March of each year. The exercise price is equal to the fair
market value of the shares underlying the option on the date of grant. The
1994 Directors' Plan provides that options granted thereunder will become
cumulatively exercisable for up to 33-1/3% of the shares covered thereby after
one year and an additional 33-1/3% in each of the next two years. In the event
of a change in control or threatened change in control of the Bank or the
Corporation, all options granted prior to such change in control or threatened
change in control will become exercisable immediately. Options expire ten
years after the date of grant.

On March 3, 1997, each of the seven Outside Directors automatically
was granted an option under the 1994 Directors' Plan to purchase 1,050 shares
of the Corporation's Common Stock at a per share exercise price of $11.50 (the
per share market price of the Corporation's Common Stock on that date). Giving
effect to that grant, the total number of shares of the Corporation's Common
Stock subject to outstanding grants under the 1990 and 1994 Directors' Plans
was 51,450, and there

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<PAGE> 9

remained available 39,000 shares for future grants under the 1994 Directors'
Plan. The 1990 Directors' Plan expired on January 24, 1995, therefore no more
options will be granted under that Plan.

EXECUTIVE COMPENSATION

COMPENSATION SUMMARY

The following table summarizes certain information for each of the
last three years concerning all compensation awarded or paid to or earned by
the Chief Executive Officer and certain other executive officers of the
Corporation whose total compensation for 1996 exceeded $100,000.

<TABLE>
<CAPTION>
Summary Compensation Table
------------------------------------------------------------------------------------
ANNUAL COMPENSATION(1) LONG TERM COMPENSATION
------------------------------------------------------------------------------------
Name and Other Options/ Other Annual
Principal Position Year Salary Bonus Compensation SARs (#)(4) Compensation
----------------------- ---- ---------- ------ --------------- ----------- --------------
($) ($)(2) ($)(3) ($)(5)
----- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Dennis M. Conerton 1996 $93,500 $46,750 $4,414 10,000 $24,170
President and Chief Executive 1995 $71,923 $34,163 $1,817 100,000 $10,000
Officer of Corporation and Bank
since February 20, 1995

James P. Kelley 1996 $82,727 $13,693 $1,827 -0- $13,613
Executive Vice President and 1995 $79,726 $13,391 $1,524 -0- $13,856
Secretary of Corporation and 1994 $77,130 $2,872 $1,651 -0- $15,964
Executive Vice President of
Bank

Jesse L. Calkins 1996 $78,580 $12,453 $2,244 -0- $15,857
Senior Vice President and 1995 $76,283 $12,045 $2,142 -0- $15,998
Senior Trust Officer of Bank 1994 $73,880 $1,436 $1,683 -0- $17,647
</TABLE>

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

(1) While the named individual received perquisites or other personal
benefits in the years shown, in accordance with SEC regulations, the
value of those benefits are not indicated since they did not exceed,
in the aggregate, the lesser of $50,000 or 10% of the individual's
salary and bonus in any year.

(2) Annual bonus amounts are earned and accrued during the years indicated
and paid at the beginning of the next calendar year.

(3) Represents amounts provided for an automobile allowance and related
expenses.

(4) Consists entirely of non-qualified stock options (adjusted, as
necessary, to reflect the 1994 and 1995 Stock Splits).

(5) Includes: (a) employer contributions to each named executive's
account under the qualified, non-contributory pension plan maintained
by the Bank in the amounts of $0 and $11,076 for Mr. Conerton for the
years 1995 and 1996, respectively, in the amounts of $7,258, $6,897,

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<PAGE> 10

and $7,881 for the years 1994, 1995 and 1996, respectively, for Mr.
Kelley, and in the amounts of $6,932, $6,409, $7,502 for the years
1994, 1995 and 1996, respectively, for Mr. Calkins; (b) allocations to
the account of the named executive officers under the Corporation's
ESOP in the amounts of $0 and $2,229 for the years 1995 and 1996,
respectively, for Mr. Conerton, in the amounts of $7,191, $4,715 and
$3,216 for the years 1994, 1995 and 1996, respectively, for Mr. Kelley
and in the amounts of $65,992, $4,407 and $3,071, for the years 1994,
1995 and 1996, respectively, for Mr. Calkins; (c) premiums paid on
behalf of the named executive officers for life insurance pursuant to
the Plan for Life Insurance maintained by the Bank in the amount of
$4,843 for each of the years 1995 and 1996 for Mr. Conerton, in the
amount of $2,763 for each of the years 1994, 1995 and 1996 for Mr.
Kelley, and in the amount of $3,040 for each of the years 1994, 1995
and 1996 for Mr. Calkins; and (d) additional insurance benefits in the
amount of $5,157 for each of the years 1995 and 1996, for Mr.
Conerton.

(5) Prior to February 20, 1995, Mr. Conerton was a Director of the
Corporation, but did not serve as, and received no compensation as, an
officer or employee of the Corporation.

EXECUTIVE STOCK OPTIONS

Prior to its expiration on January 24, 1995, the Corporation
maintained the Blackhawk Bancorp, Inc. 1990 Executive Stock Option Plan (the
"1990 Executive Plan"), which provided an incentive for executive officers of
the Corporation or any of its subsidiaries to improve corporate performance on
a long-term basis. To replace the expired 1990 Executive Plan, the Board of
Directors of the Corporation adopted, and on May 11, 1994 the shareholders
approved, the Blackhawk Bancorp, Inc. 1994 Executive Stock Option Plan (the
"1994 Executive Plan"), which is substantially similar in all material respects
to the 1990 Executive Plan. The 1994 Executive Plan provides for the granting
of incentive stock options ("ISOs") intended to qualify as such within the
meaning of Section 422 of the Internal Revenue Code of 1986, nonqualified stock
options ("NSOs") and stock appreciation rights ("SARs"). The 1994 Executive
Plan has 180,000 shares of the Corporation's Common Stock reserved for
issuance. Options for 11,000 shares were granted in 1996 and at December 31,
1996 there were outstanding under this Plan options for the purchase of a total
of 68,000 shares. The 1994 Executive Plan expires March 9, 1999.

SUMMARY OF 1994 EXECUTIVE PLAN TERMS

The 1994 Executive Plan is administered by a committee of the Board of
Directors consisting of non-employee directors (the "Option Committee"). The
Option Committee, in its complete discretion, designates the persons to be
granted options, the type of options and the date of grant, and also determines
the number of shares subject to such options, the exercise price and the time
or times when each option will first become exercisable, in whole or in part.

In conjunction with the grant of NSOs, the Option Committee may grant
up to 0.5 SARs to key salaried employees for each share subject to an NSO. The
grant of an SAR permits the optionee to surrender the SAR in connection with
the exercise of the related NSO and receive cash in an amount equal to the
difference between the fair market value of the stock subject to the option and
the exercise price. The terms of the SAR will be identical to the related NSO.
To the extent that an NSO is exercised without a simultaneous exercise of the
related SAR, such SAR will terminate. An SAR must be held for at least six
months from the date of acquisition before it may be surrendered, and may only
be surrendered during the periods beginning on the third business day following
the date of release for publication of quarterly or annual summary statements
of sales and earnings and ending on the twelfth business day following such
date.

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<PAGE> 11

The exercise price of ISOs granted under the 1994 Executive Plan may
not be less than 100% of the fair market value of the shares on the date of
grant of the option. For NSOs, the exercise price will not be less than 90% of
the fair market value of the shares on the grant date. The maximum option term
is generally ten years for ISOs and NSOs, and no option may be exercised until
at least twelve months from the date of the date of grant. No person can
receive any ISO if, at the time of grant, such person owns directly or
indirectly more than 10% of the total combined voting power of the Corporation
unless the exercise price is at least 110% of the fair market value of the
shares and the exercise period of such ISO is by its terms limited to five
years. The maximum fair market value (determined at time of grant) of shares
covered by ISOs that first become exercisable by any employee in any one
calendar year is limited to $100,000.

Payment of the exercise price upon exercise of an option may be made
either in cash, or, in the discretion of the Option Committee, in shares of the
Corporation's Common Stock valued at their fair market value as of the date of
exercise, or in a combination thereof. Options and SARs granted under the 1994
Executive Plan become cumulatively exercisable for up to 33-1/3% of the shares
covered thereby after one year, and an additional 33-1/3% in each of the next
two years, unless a longer vesting schedule is provided in the option
agreement. In the event of a change in control or threatened change in control
of the Bank or the Corporation, options granted prior to such event will become
immediately exercisable.

OPTIONS OF NAMED EXECUTIVES

Options to purchase shares of the Corporation's Common Stock were
granted to Mr. Conerton of the named executives during fiscal 1996 as reflected
in the table below. Pursuant to the terms of the 1994 Executive Plan, such
options will become exercisable in equal thirds on each of the first three
anniversaries of the date of grant.

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR

Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise Market
Options/SARs Employees in Price Price Expiration
Name Granted Fiscal Year ($/Share) ($/Share) Date(2)
----- ----------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Dennis M. Conerton 10,000 91% 11.25(1) 12.50 December 24, 2006

James P. Kelley -0- -- -- -- --

Jesse L. Calkins -0- -- -- -- --
</TABLE>

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

(1) Represented 90% of fair market value (determined under provisions of
1994 Executive Plan) of the Corporation's Common Stock as of the date
of grant.

(2) Options generally expire three months following named executive
officer's death, disability, retirement or termination of his
employment with the Corporation and/or the Bank.

-9-
<PAGE> 12

The following table sets forth certain information concerning
individual exercises of stock options by the named executive officers during
1996, including the number and value of options outstanding at the end of 1996
for each of the named executive officers.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
---------------------------- ----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dennis M. Conerton None $ -0- 38,233 77,017 $146,008 $226,818

James P. Kelley None $ -0- 29,925 0 $218,997 $0

Jesse L. Calkins None $ -0- 29,925 0 $218,997 $0
</TABLE>

SEVERANCE PAYMENT AGREEMENTS

The Bank has severance payment agreements with four officers: Dennis
M. Conerton, James P. Kelley, Jesse L. Calkins and Richard J. Rusch (the
"Severance Payment Agreements"). Each agreement remains in effect until the
earliest to occur of the officer's: (i) death; (ii) disability; (iii)
retirement; (iv) termination of employment (whether voluntary or involuntary);
or (v) termination in connection with a change in control of the Bank or the
Corporation.

Each of the Severance Payment Agreements provides that, in the event
of termination of his employment in connection with a change in control of the
Bank or the Corporation, the officer would receive a severance payment in an
amount equal to his average annual compensation (defined to include his then
current base annual salary plus the average bonus, if any, received by him in
the three years preceding termination) multiplied by three, plus an amount
equal to the dollar equivalent of all contributions by the Bank on behalf and
for the benefit of the officer to any pension, profit sharing or employee stock
benefit plan, including the Corporation's ESOP, during the three years prior to
the termination. One-third of the severance payment would be paid in a lump
sum within 30 days of termination and the remaining two-thirds would be paid in
monthly installments commencing in the thirteenth month following termination.
In addition to this severance payment, the officer would also be entitled to
continue receiving, for three years following termination, medical, life and
disability insurance benefits and vested benefits otherwise payable to him
under any Bank plan or agreement relating to retirement or deferred
compensation benefits, if any. In the event the particular officer finds other
full-time employment, his severance payment in the second and third year
following termination would be reduced by an amount equal to salary and other
benefits received from his new employer during the period for which he is
entitled to receive payments under his Severance Payment Agreement. Each
Severance Payment Agreement provides that, in the event the officer is under
the age of 55 and physically and medically able to perform duties with another
employer comparable to those performed by him with the Bank at the time of his
termination, he must take reasonable steps to obtain such employment within 50
miles of the Bank's main office.

The Severance Payment Agreements define a change in control to
include: (i) acquisition of beneficial ownership of securities of the Bank or
of the Corporation in a transaction subject to the notice provisions of the
Change in Bank Control Act of 1978 or approval under the Bank Holding Company
Act of 1956; (ii) someone other than the Corporation becoming owner of more
than 25% of the voting

-10-
<PAGE> 13

securities of the Bank; (iii) the persons constituting the Board of Directors
of the Bank or the Corporation at any particular time ceasing, during any
two-year period thereafter, to constitute at least a majority thereof; (iv) a
person or group of persons or entity succeeds to all or substantially all of
the business and/or assets of the Bank or the Corporation as a result of a
purchase, merger, consolidation or similar transaction; or (v) the filing by
the Corporation of a report or proxy statement with the Securities and Exchange
Commission disclosing that a change in control of the Corporation has or may
have occurred pursuant to any contract or transaction. A termination of an
officer is deemed to have occurred in connection with a change in control if,
following an event defined as a change in control, either the officer's
employment is terminated by the Bank or a successor other than for death,
disability, retirement or certain wrongful conduct by the officer, or the
officer terminates his employment on 90 days prior written notice following
such change in control and the occurrence of specified events, including: (i)
demotion in his position or reduction in his duties of responsibilities; (ii)
reduction in compensation; (iii) transfer to a remote location; (iv) a good
faith determination by the officer that he is unable, and it would not be in
the best interests of the Bank for him, to carry out the authorities, powers,
functions, responsibilities or duties attached to his position; or (iv) failure
on the part of the Bank to obtain a commitment from a successor to assume the
Bank's duties and obligations under the Severance Payment Agreement. If an
officer is terminated within six months prior to a change in control for
reasons other than death, disability or cause, such termination will be treated
as being in anticipation of the change in control and the officer will be
entitled to receive the benefits he would have received had the termination
occurred after and in connection with a change in control.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Under the Securities Exchange Act of 1934, as amended (the "1934
Act"), the Corporation's directors, executive officers and any person holding
more than 10% of the Corporation's Common Stock are required to report their
initial ownership of the Corporation's Common Stock and any subsequent changes
in that ownership to the Securities and Exchange Commission. Specific due
dates for these reports have been established and the Corporation is required
to disclose in this Proxy Statement any failure to file such reports by these
dates during 1996. Based solely on a review of copies of such reports
furnished to the Corporation, or written representations that no reports were
required, the Corporation believes that during 1996 all filing requirements
applicable to its directors and executive officers were satisfied.

CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS

The Bank occasionally extends home mortgage loans, home improvement
loans, home equity loans, consumer loans and commercial loans to its directors,
officers and employees, and affiliates of the foregoing. Such loans are made
in the ordinary course of business, do not, in the opinion of management of the
Bank, involve more than the normal risk of collectability or present other
unfavorable features, and are made on substantially the same terms, including
interest rate and collateral, as those prevailing at the time for comparable
transactions with other persons. Where the borrower is also a director of the
Bank, it is the policy of the Bank that he must leave the meeting of the Bank's
Board of Directors while his loan is being considered and he neither
participates in that consideration nor votes on approval of the loan. Messrs.
Hart, Hendricks, Klett and Taylor or their affiliates, each had one or more
loans with the Bank with an aggregate outstanding balance at December 31, 1996
in excess of $60,000. As of that date, those loans aggregated $1,909,522,
which represented approximately 10.6% of the capital of the Bank at December
31, 1996 Those loans were all made in accordance with the policy described
above.

-11-
<PAGE> 14

OTHER INFORMATION

AUDITORS

The firm of Lindgren, Callihan, Van Osdol & Co., Ltd. ("Lindgren") has
acted as independent auditor of the Corporation for the year 1996. While the
Corporation has been satisfied with the services of Lindgren, it has not yet
appointed an independent auditor for the year 1997 as the audit committee is
considering soliciting several proposals from different independent auditors,
including Lindgren, for the year 1997. A representative of Lindgren is
expected to be present at the Annual Meeting of Shareholders to respond to
appropriate questions and, if the representative so desires, to make a
statement.

SHAREHOLDER PROPOSALS

Shareholder proposals must be received by the Corporation no later
than December 2, 1997 in order to be considered for inclusion in next year's
annual meeting proxy statement.

OTHER AGENDA ITEMS

The Board of Directors has not been informed and is not aware that any
other matters will be brought before the meeting. However, proxies may be
voted with discretionary authority with respect to any other matters that may
properly be presented at the meeting or any adjournment thereof.

BY ORDER OF THE BOARD OF DIRECTORS

JAMES P. KELLEY
Executive Vice President and Secretary

Beloit, Wisconsin
April 2, 1997

A COPY (WITHOUT EXHIBITS) OF THE CORPORATION'S ANNUAL REPORT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996 IS AVAILABLE WITHOUT CHARGE TO EACH RECORD OR
BENEFICIAL OWNER OF SHARES OF THE CORPORATION'S COMMON STOCK AS OF MARCH 25,
1997 ON THE WRITTEN REQUEST OF SUCH PERSON DIRECTED TO: JESSE L. CALKINS,
SENIOR VICE PRESIDENT AND TREASURER, BLACKHAWK BANCORP, INC., 400 BROAD STREET,
BELOIT, WISCONSIN 53511.

-12-
<PAGE> 15

1997 ANNUAL MEETING OF SHAREHOLDERS OF BLACKHAWK BANCORP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Dennis M. Conerton, James P. Kelley and Jesse
L. Calkins, and each of them, proxies, each with full power of substitution, to
represent and to vote all shares of stock the undersigned is entitled to vote
at the Annual Meeting of Shareholders of Blackhawk Bancorp, Inc. to be held at
the Country Club of Beloit, 2327 Riverside Drive, Beloit, Wisconsin 53511, on
Wednesday, May 14, 1997 at 10:00 a.m. (local time), and at any adjournment
thereof, hereby revoking any and all proxies previously given.

<TABLE>
<S> <C> <<C> <C> <<C> <C>
(1) ELECTION OF DIRECTORS: [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
below for term ending in for all nominees listed
2000 (except as marked to below for term ending in
the contrary below) 2000
</TABLE>

JESSE L. CALKINS, DENNIS M. CONERTON, KENNETH A. HENDRICKS, GEORGE D. MERCHANT

(INSTRUCTION: To withhold authority to vote for any individual nominee, print
that nominee's name on the line provided below.)

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

(2) In their discretion on such other matters as may properly come before the
meeting or any adjournment thereof, all as set out in the Notice and Proxy
Statement relating to the meeting, receipt of which is hereby acknowledged.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PERSONS NAMED IN PROPOSAL 1.

Please return promptly in the enclosed envelope.

Dated: , 1997
--------------------------

---------------------------------
Signature of shareholder

(Please sign exactly as name appears at
left. If stock is owned by more than one
person, all owners should sign. Persons
signing as executors, administrators, trustees
or in similar capacities should so indicate.
If a corporation, please sign in full corporate
name by the president or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.)
<PAGE> 16
Annex A

BLACKHAWK BANCORP, INC.

COUNTING ON COMMUNITY BANKING

[Graphic representation of beads on an abacus that are decorated as currency]

1996 ANNUAL REPORT

<PAGE> 17

COUNTING ON COMMUNITY BANKING

JUST AS THE ABACUS SYMBOLIZES THE AGE OLD METHOD OF COUNTING, BLACKHAWK STATE
BANK'S MANAGEMENT TEAM EXEMPLIFIES A 116 YEAR OLD PHILOSOPHY OF COMMUNITY
BANKING THAT YOU CAN COUNT ON.

BLACKHAWK STATE BANK, SUBSIDIARY OF BLACKHAWK BANCORP, INC. IS LOCATED AT
400 BROAD STREET, 1795 MADISON ROAD, 2200 CRANSTON ROAD AND 20 PARK AVENUE,
INSIDE CUB FOODS, BELOIT, WISCONSIN.

FOUNDED IN 1881
MEMBER OF THE FEDERAL DEPOSIT INSURANCE CORPORATION

<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
FINANCIAL HIGHLIGHTS ........................... 1
LETTER TO STOCKHOLDERS ......................... 2-3
COUNTING ON COMMUNITY BANKING .................. 4-5
FINANCIAL REVIEW ............................... 6-15
CONSOLIDATED BALANCE SHEETS ................. 6
CONSOLIDATED STATEMENTS OF INCOME ........... 7
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY ........................... 8

CONSOLIDATED STATEMENTS OF CASH FLOWS ....... 9
INDEPENDENT AUDITOR'S REPORT ................... 10
MANAGEMENT'S DISCUSSION AND ANALYSIS ...........11-15
QUARTERLY FINANCIAL INFORMATION ................ 15
BOARD OF DIRECTORS/BANK OFFICERS ............... 16

</TABLE>
<PAGE> 18

FINANCIAL HIGHLIGHTS

(in thousands except for per share data)
<TABLE>
<CAPTION>

December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................. $11,323 $ 10,582 $9,346 $9,588 $10,491
Interest expense................................. 5,394 5,079 4,224 4,277 5,343
------- --------- ------ ------ ------
Net interest income.............................. 5,929 5,503 5,122 5,311 5,148
Provision for loan losses........................ 145 180 220 120 238
------- --------- ------ ------ ------
Net income after provision for loan losses....... 5,784 5,323 4,902 5,191 4,910
Gains from sale of securities.................... -- 18 -- -- --
Non-interest income, less gains from sales
of securities.................................. 1,006 760 598 623 482
Non-interest expense............................. 4,214 4,028 4,214 3,464 3,246
------- --------- ------ ------ ------
Income before income taxes....................... 2,576 2,073 1,286 2,350 2,146
Income tax expense............................... 848 601 346 745 645
------- --------- ------ ------ ------
NET INCOME....................................... $1,728 $ 1,472 $ 940 $1,605 $1,501
------- --------- ------ ------ ------
Income per common share (1)...................... $ 0.73 $ 0.64 $ 0.41 $ 0.71 $ 0.67
------- --------- ------ ------ ------
Cash dividend declared per share (1)............. $ 0.38 $ 0.30 $ 0.27 $ 0.20 $ 0.20
------- --------- ------ ------ ------

</TABLE>

(1) Restated for a 2 for 1 stock split as of March 31, 1994, and a 3 for 2
stock split as of June 15, 1995.

<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets...................................... $151,484 155,531 141,570 $135,181 $133,298
Securities, net................................... 35,567 37,366 36,084 34,907 33,722
Total loans, net.................................. 98,241 93,548 88,716 86,256 79,804
Deposits.......................................... 118,311 119,717 114,738 109,662 107,932
Repurchase agreements and federal funds purchased 7,405 9,680 4,047 4,319 5,237
Long-term debt.................................... 2,275 3,629 1,533 186 240
Total capital..................................... 22,029 21,189 19,962 19,697 18,463
</TABLE>

TOTAL AVERAGE DEPOSITS (in thousands of dollars)
[BAR CHART]

TOTAL AVERAGE ASSETS (in thousands of dollars)
[BAR CHART]

NET INTEREST INCOME (in thousands of dollars)
[BAR CHART]

BLACKHAWK BANCORP 1 ANNUAL REPORT 1996

<PAGE> 19

TO OUR STOCKHOLDERS, CUSTOMERS AND EMPLOYEES

I am very happy to report the continued success of Blackhawk Bancorp, Inc.
during 1996. This past year, which marked our 115th anniversary of providing
financial services, ended with a number of significant achievements.

RECORD FINANCIAL PERFORMANCE
Net income for the year ending December 31, 1996 was a record $1,728,000,
increasing 17% from income of $1,472,000 for the year ending December 31, 1995.
Earnings per share increased to $.73 from $.64 in 1995.
Focusing first on financial soundness and profitability and secondly on
growth, we are pleased to have increased our return on average assets and
average equity for the second straight year to 1.16% and 7.99%, respectively as
compared to 1.05% and 7.01% in 1995.
Net interest income increased approximately 8% in 1996 to a record
$5,929,000. Contributing to this increase was a 5% growth in gross loans
outstanding as well as an increase in net interest margin which has been a
strategic objective of ours, despite national trends which have seen this
margin declining.
Noninterest income, also the highest ever, increased 29% this past year.
Gains on the sale of secondary market mortgage loans nearly doubled last year's
levels. The combined growth of our Trust Department and Investment Center also
resulted in their revenues increasing almost 40%. With our continued rise in
profitable customer relationships, other service fees increased 22%.

AS WE MOVE FORWARD, WE
REMAIN COMMITTED TO
OUR STRATEGIC PLAN FOR
PROFITABLE GROWTH.

We were successful in continuing to change our mix of deposits with gains
in demand deposits and less dependence on time deposits, a traditional source
of funds for our bank prior to our conversion to a commercial banking charter
in 1990. In 1996, average demand deposit balances increased over 16%, while
total average deposits increased 2%.

IMPROVED EFFICIENCIES
One of our competitive strengths has been our lower operating costs
relative to similar financial institutions our size. I am pleased to report
that during 1996 we continued to improve in this area which also contributed to
our increase in net income. Our efficiency ratio, which measures how many
cents it takes to create a dollar of revenue, declined to 60.8% in 1996
compared to 64.3% in 1995.
As we grow, we will continue to manage our costs in relation to revenue in
order to maintain this competitive edge. This will be especially important as
an increasing number of highly cost effective, non-bank competitors enter the
financial services marketplace.

DEPLOYMENT OF CAPITAL
Since our initial public offering and conversion to a commercial banking
charter, we have operated with an exceptionally strong capital base. Our core
capital as a percentage of assets was 14.4% as of December 31, 1996 as compared
to the regulatory requirement of 5.5%. While the financial soundness and
safety of the institution is a primary concern, an above average return on our
stockholders' equity is also a major objective that we have. We realize that
while our returns on equity are improving, they need to increase to the "double
digit" levels more comparable to other investments with similar risks.
With that objective, we are excited about our pending acquisition of
Rochelle Bancorp, Inc. in Rochelle, Illinois which we announced in November.
The cash purchase of this financial institution will not only geographically
diversify our market with two additional banking offices and a financing
subsidiary, but is also an initial step in leveraging our strong equity base to
increase the returns to our stockholders. The acquisition, which should be
completed in the second quarter of 1997, will take us into the Illinois cities
of Rochelle, Oregon and Rockford with its subsidiaries Rochelle Savings Bank
S.S.B. and Midland Acceptance Corporation.

BLACKHAWK BANCORP 2 ANNUAL REPORT 1996
<PAGE> 20

In May of 1996, the Board of Directors of Blackhawk Bancorp, Inc. also
increased the quarterly cash dividend to stockholders by 25% from $.08 to $.10
per share. The strong capital base and increased earnings of the organization
were evaluated in this decision. A solid dividend level is considered to be an
important factor in our overall stockholder returns.

CAPITAL EXPENDITURES
We also continued to invest in technology and capital expenditures that
will enhance our bottom line and improve the delivery systems for both our
retail and commercial products. Our new MasterMoney Debit Card introduced last
year continues to grow in acceptance, providing customers the ability to make
normal purchases from their checking accounts without ever writing a check. In
December, we announced our plans to open our second in-store branch in the new
Wal-Mart Supercenter currently being constructed in Beloit. Scheduled to open
in the summer of 1997, this new branch will offer our customers the convenience
of full service banking seven days a week, including evening hours, to
compliment their busy schedules.
Early in 1997, we will also introduce our Access 2000 Cash Management
System which will allow our commercial customers the ability to directly access
their accounts electronically. It is clear that all customers value
convenience and we are committed to provide that to them.
Other capital investments continue to be made in software enhancements so
we can better provide profitable services to our customers at competitive
prices.

ORGANIZATION AND STAFF
As a community bank, our success hinges heavily upon the personal service
offered by our experienced, loyal staff of professionals. We are proud of the
reputation that we have earned and the trust that has been built with our
customers over the years. We are committed to treasure those relationships with
the highest degree of personalized service, aided by technology, to meet our
customers' needs conveniently and efficiently.
To heighten our ability to meet these needs, we reorganized our retail
banking system late in 1996, to continue the improvement in our sales and
service levels offered throughout our retail delivery channels.
[PHOTO OF DENNIS M. CONERTON]

FUTURE OUTLOOK
As we move forward, we remain committed to our strategic plan for
profitable growth. The further leveraging of our strong capital position to
increase stockholder returns will continue to be an area of focus for us.
Emphasis on operational efficiencies is also key for our future prosperity.
It is important that we do not lose our competitive advantage in this area of
bank operations.
The development of new product delivery systems will progress as we look
for better and more efficient ways to provide banking services to both our
retail and commercial customers. At the same time, we must look for ways to
expand upon our current customer base through the creation of more multiple
relationship customers.
As we have seen over the past several years, our industry, the regulations
that govern it, and the needs of our customers are fast changing. To succeed
in this environment, we need to evaluate our past, analyze the present and
strategically plan for our future. I assure you that these three steps to
success are in place and we will work tirelessly to create the best financial
returns for our loyal stockholders. I thank you for your support of Blackhawk
Bancorp, Inc., and look forward to reporting to you throughout 1997 and beyond.

Sincerely,

[CONERTON SIG]
Dennis M. Conerton
President and Chief Executive Officer

BLACKHAWK BANCORP 3 ANNUAL REPORT 1996
<PAGE> 21

COUNTING ON COMMUNITY BANKING

There is something special about a community where neighbors count on
neighbors and friends share the important moments in life. It's people that
make a community a special place, yet there's one business in town that works
hard to make it all possible...your community bank. Blackhawk State Bank,
along with the residents and businesses of the Greater Beloit area, count on
each other, creating a very unique partnership. For 116 years the bank has
nurtured the dreams and ever changing financial needs of our growing community.
This partnership breathes life into the economy of Greater Beloit. The
funds deposited in this bank are used to make loans to local residents and
businesses. Unlike many larger corporate banks that are headquartered outside
of the area, the majority of the loans we make are used for the purchase
of housing and the expansion of local business right here at home. Banking
at Blackhawk State Bank allows people to contribute to the prosperity of the
entire community.
LOCAL PEOPLE are who you'll find directing the future and the growth of
Blackhawk State Bank. We derive a great sense of pride from the fact that our
Directors, Officers, Managers and Staff live and work in our community. Not
only do they serve you as a customer of the bank, they also raise their
children here, enjoy involvement in social organizations, and strive to make
our community a better place....just like you do. We know that it's important
for you to be able to count on your strong, progressive community bank as a
partner. Whether you're opening a new checking account, buying a new home or
starting a new business, we're here for you.
The ability to make decisions locally is a key element of the bank's
partnership with our community. Because we know our market and the needs of
local consumers and business owners, we're better able to fulfill your
financial requirements. Blackhawk State Bank is an important part of the
social and economic fabric of Greater Beloit, enhancing the quality of life
that area residents enjoy.
COMMUNITY REINVESTMENT is a critical function of a strong, local banking
organization. We take this role seriously and support many aspects of what
makes and keeps our community vigorous and growing. For more than a century,
Blackhawk State Bank has played a major role in the development of business
and industry, the arts and education. We're proud to support the

BLACKHAWK STATE BANK,
ALONG WIH THE RESIDENTS
AND BUSINESS OF THE
GREATER BELOIT AREA, COUNT
ON EACH OTHER, CREATING A
VERY UNIQUE PARTNERSHIP

BLACKHAWK BANCORP 4 ANNUAL REPORT 1966

<PAGE> 22

efforts of associations that work to improve the quality of life, health and
welfare for the people of Greater Beloit. As a partner of Neighborhood
Housing Services, we assist area residents in understanding the process and the
importance of purchasing a home. Our own Create-A-Doll For Giving program is
a partnership between the bank and the community to provide holiday gifts for
underprivileged children; our employees generously aid the fund raising efforts
of the Stateline United Way and its member agencies. These are just a few
examples of the many partnerships that have been formed over the years.
DEDICATED BANK EMPLOYEES are the cornerstone of Blackhawk State Bank.
These valued employees are your neighbors and your friends. While some of our
employees have been with the bank for over 25 years, and some for a shorter
period of time, they share the desire to provide excellent customer service.
The banking industry is changing at an extremely rapid pace, however, there has
been no change in the bank's philosophy of "customer first" service. This
philosophy makes clear to our employees the high value we place on our
customers and empowers them to meet and exceed customer expectations.

[THREE PHOTOS OF THE GENERAL PUBLIC]

EXPANSION marks the growth of a successful business and Blackhawk State
Bank is no exception. Early this summer, we will open our fifth branch banking
location. This office will be located inside the new Wal-Mart Supercenter in
Beloit and will be the bank's second, 7 days-a-week banking facility. Our new
office will allow customers to conduct banking business including the opening
of new accounts, applying for consumer loans and credit cards and the
completion of routine transactions. As we like to say, "We're On The Grow in
1997."
Count on Blackhawk State Bank to develop the partnership that you need.
As we move forward with implementing new technological advances designed to
make your life and your banking easier, we remain committed to personal
relationships that make our bank special for you.
Count on your strong, local, community bank.... Blackhawk State Bank.

BLACKHAWK BANCORP 5 ANNUAL REPORT 1996
<PAGE> 23

Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS

December 31, 1996, and 1995

<TABLE>
<CAPTION>
ASSETS 1996 1995
------------------------
<S> <C> <C>
Cash and cash equivalents............................................................... $ 7,966,929 $ 7,589,600
Federal funds sold and other short-term investments..................................... 4,677,596 11,734,905
Securities:
Held-to-maturity...................................................................... 24,864,640 25,794,108
Available-for-sale.................................................................... 10,701,911 11,571,581
Loans, net of allowance for loan losses of $1,185,672 in 1996 and $928,817 in 1995...... 98,241,019 93,548,027
Bank premises and equipment, net........................................................ 3,463,491 3,732,418
Accrued interest receivable............................................................. 1,041,756 1,217,561
Income tax receivable................................................................... 94,638 35,812
Other assets............................................................................ 432,025 307,436
--------------------------
TOTAL ASSETS.......................................................................... $151,484,005 $155,531,448
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits:
Non-interest bearing.................................................................. $ 23,193,906 $ 22,513,544
Interest bearing...................................................................... 95,116,941 97,203,385
--------------------------
TOTAL DEPOSITS...................................................................... 118,310,847 119,716,929
--------------------------

Borrowed funds:
Short-term borrowings................................................................ 7,405,451 9,679,833
Long-term borrowings................................................................. 2,275,456 3,629,027
--------------------------
TOTAL BORROWED FUNDS............................................................... 9,680,907 13,308,860
--------------------------

Accrued interest payable............................................................. 680,226 693,364
Other liabilities.................................................................... 782,827 622,811
--------------------------
TOTAL LIABILITIES.................................................................. 129,454,807 134,341,964
--------------------------

COMMITMENTS AND CONTINGENT LIABILITIES

STOCKHOLDERS' 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 and outstanding 2,285,864 in 1996 and 2,282,615 in 1995.................... 22,859 22,826
Additional paid in capital.......................................................... 6,960,550 6,946,370
Employee stock options earned....................................................... 94,764 52,165
Retained earnings................................................................... 15,072,129 14,210,036
Less treasury stock, at cost........................................................ (84,305) --
Net unrealized gains (losses) on securities available-for-sale...................... (11,343) 37,114
--------------------------
22,054,654 21,268,511

Less: Deferred compensation related to employee stock ownership
plan debt guarantee............................................................ (25,456) (79,027)
--------------------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 22,029,198 21,189,484
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $151,484,005 $155,531,448
==========================
</TABLE>

BLACKHAWK BANCORP 6 ANNUAL REPORT 1996

<PAGE> 24

Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994

1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................... $ 8,777,209 $ 8,327,565 $ 7,270,387
Interest on securities:
Taxable...................................................... 2,122,793 1,895,205 1,650,537
Exempt from Federal income taxes............................. 221,105 199,168 302,878
Interest on federal funds sold and other short-term investments 201,741 160,031 122,381
-------------------------------------
TOTAL INTEREST INCOME...................................... 11,322,848 10,581,969 9,346,183
-------------------------------------
INTEREST EXPENSE:
Interest on deposits............................................ 4,578,120 4,485,677 3,907,408
Interest on short-term borrowings............................... 642,894 379,219 256,640
Interest on long-term borrowings................................ 173,090 214,223 59,878
-------------------------------------
TOTAL INTEREST EXPENSE..................................... 5,394,104 5,079,119 4,223,926
-------------------------------------

NET INTEREST INCOME........................................ 5,928,744 5,502,850 5,122,257
Provision for loan losses....................................... 145,000 180,000 220,000
-------------------------------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........ 5,783,744 5,322,850 4,902,257
-------------------------------------
OTHER OPERATING INCOME:
Trust department income......................................... 121,739 87,826 73,383
Service fees.................................................... 568,951 467,800 412,991
Realized gains on securities.................................... -- 17,785 --
Gain on sale of loans........................................... 75,372 37,996 29,331
Other income.................................................... 239,735 166,496 82,413
-------------------------------------
TOTAL OTHER OPERATING INCOME............................... 1,005,797 777,903 598,118
-------------------------------------
OTHER OPERATING EXPENSES:
Salaries and wages............................................. 1,767,328 1,640,139 1,430,820
Employee benefits.............................................. 436,445 357,297 455,052
Occupancy expense of bank premises............................. 309,313 300,160 239,169
Furniture and equipment........................................ 349,928 383,072 296,712
Data processing................................................ 320,109 299,447 391,707
Federal deposit insurance premiums............................. 2,000 127,272 239,208
Professional fees.............................................. 199,373 207,417 365,522
Advertising and marketing...................................... 112,790 118,236 105,111
Other operating expenses....................................... 716,319 595,083 691,123
-------------------------------------
TOTAL OTHER OPERATING EXPENSES.............................. 4,213,605 4,028,123 4,214,424
-------------------------------------
INCOME BEFORE INCOME TAXES.................................. 2,575,936 2,072,630 1,285,951
Provision for income taxes..................................... 847,661 600,743 345,949
-------------------------------------
NET INCOME.................................................. $ 1,728,275 $ 1,471,887 $ 940,002
=====================================
NET INCOME PER SHARE........................................ $ .73 $ .64 $ .41
=====================================
DIVIDENDS PER SHARE......................................... $ .38 $ .30 $ .27
=====================================
</TABLE>

BLACKHAWK BANCORP 7 ANNUAL REPORT 1996

<PAGE> 25

Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, and 1995

Additional
Common Paid in Stock Retained
Stock Capital Options Earnings
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .......................... $ 7,492 $ 6,777,046 $ 9,384 $13,089,223

Net income .......................................... -- -- -- 940,002
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on
common stock, $.27 per share ...................... -- -- -- (599,830)
Adoption of FASB #115 ............................... -- -- -- --
Net change in unrealized gains (losses) on securities
available-for-sale ................................. -- -- -- --
Stock Split ......................................... 7,495 -- -- (7,495)
Compensatory employee stock options:
Recognized ........................................ -- -- 17,978 --
Exercised ......................................... 19 13,966 (720) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1994 .......................... 15,006 6,791,012 26,642 13,421,900

Net income .......................................... -- -- -- 1,471,887
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on common
stock, $.30 per share ............................. -- -- -- (676,140)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- -- -- --
Stock split ......................................... 7,593 -- -- (7,611)
Compensatory employee stock options:
Recognized ........................................ -- -- 33,697 --
Exercised ......................................... 227 155,358 (8,174) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1995 .......................... 22,826 6,946,370 52,165 14,210,036

Net income .......................................... -- -- -- 1,728,275
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on common
stock, $.38 per share ............................. -- -- -- (866,182)
Purchase of stock for treasury, 7,578 shares
at $11.13 per share ............................... -- -- -- --
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- -- -- --
Compensatory employee stock options:
Recognized ........................................ -- -- 42,654 --
Exercised or expired .............................. 33 14,180 (55) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1996 .......................... $ 22,859 $ 6,960,550 $ 94,764 $15,072,129
==================================================

</TABLE>

Net Unrealized
Gains (Losses) on
Securities
Treasury Available
Stock for Sale Other Total
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .......................... -- -- $ (186,170) $ 19,696,975

Net income .......................................... -- -- -- 940,002
Principal payments on ESOP loan ..................... -- -- 53,571 53,571
Cash dividends declared on
common stock, $.27 per share ...................... -- -- -- (599,830)
Adoption of FASB #115 ............................... -- 160,451 -- 160,451
Net change in unrealized gains (losses) on securities
available-for-sale ................................ -- (320,152) -- (320,152)
Stock Split ......................................... -- -- -- --
Compensatory employee stock options:
Recognized ........................................ -- -- -- 17,978
Exercised ......................................... -- -- -- 13,265
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 .......................... -- (159,701) (132,599) 19,962,260

Net income .......................................... -- -- -- 1,471,887
Principal payments on ESOP loan ..................... -- -- 53,572 53,572
Cash dividends declared on common
stock, $.30 per share ............................. -- -- -- (676,140)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- 196,815 -- 196,815
Stock split ......................................... -- -- -- (18)
Compensatory employee stock options:
Recognized ........................................ -- -- -- 33,697
Exercised ......................................... -- -- -- 147,411
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 .......................... -- 37,114 (79,027) 21,189,484

Net income .......................................... -- -- -- 1,728,275
Principal payments on ESOP loan ..................... -- -- 53,571 53,571
Cash dividends declared on common
stock, $.38 per share ............................. -- -- -- (866,182)
Purchase of stock for treasury, 7,578 shares
at $11.13 per share ............................... (84,305) -- -- (84,305)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- (48,457) -- (48,457)
Compensatory employee stock options:
Recognized ........................................ -- -- -- 42,654
Exercised or expired .............................. -- -- -- 14,158
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 .......................... (84,305) $ (11,343) $ (25,456) $ 22,029,198
================================================================
</TABLE>

BLACKHAWK BANCORP 8 ANNUAL REPORT 1996

<PAGE> 26
Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 1996, 1995 and 1994

CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Net income ...................................................................... $ 1,728,275 $ 1,471,887 $ 940,002
Adjustments to reconcile net income to net cash provided by operating activities:
Compensatory employee stock options recognized ................................ 42,599 33,697 17,978
Provision for loan losses ..................................................... 145,000 180,000 220,000
Provision for depreciation and amortization ................................... 333,294 348,424 261,124
Amortization of premiums and accretion of discounts on investment securities, net (79,542) 47,621 177,616
Gain on sale of property equipment ............................................ (2,655) -- --
Realized gains on securities .................................................. -- (17,785) --
Gain on sale of loans ......................................................... (75,372) (37,996) (29,331)
Loans originated for sale ..................................................... (5,329,228) (3,232,399) (1,925,082)
Proceeds from sale of loans ................................................... 5,164,200 3,270,395 1,954,413
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable .......................... 175,805 (84,251) (102,056)
(Increase) decrease in other assets ......................................... (183,415) 184,735 (105,651)
Increase in accrued interest and other liabilities .......................... 178,910 26,669 78,870
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 2,097,871 2,190,997 1,487,883
--------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment .................................. 11,600 -- --
Proceeds from sale of securities available-for-sale ........................... -- 2,027,813 --
Proceeds from maturity of securities held-for-maturity ........................ 11,814,812 6,800,362 8,222,764
Proceeds from maturity of securities available-for-sale ....................... 22,484,382 3,806,860 4,052,950
Purchase of securities held-to-maturity ....................................... (10,872,593) (6,991,719) (9,014,365)
Purchase of securities available-for-sale ..................................... (21,628,410) (6,758,108) (4,882,249)
(Increase) decrease in federal funds sold and other short-term investments, net 7,057,309 (4,683,512) (1,661,477)
Loans originated, net of principal collected .................................. (4,597,592) (5,013,115) (2,680,279)
Purchase of bank premises and equipment ....................................... (73,312) (1,178,618) (747,994)
--------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................ 4,196,196 (11,990,037) (6,710,650)
--------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................................... (1,406,082) 4,978,624 5,076,215
Net increase (decrease) in short-term borrowings .............................. (3,574,382) 6,932,833 (272,000)
Proceeds from long-term borrowings ............................................ -- 850,000 1,400,000
Dividends paid ................................................................ (866,182) (676,140) (599,830)
Proceeds from issuance of common stock ........................................ 14,213 147,393 13,265
Purchase of common stock for treasury ......................................... (84,305) -- --
--------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ (5,916,738) 12,232,710 5,617,650
--------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 377,329 2,433,670 394,883

Cash and cash equivalents:
Beginning .................................................................... 7,589,600 5,155,930 4,761,047
--------------------------------------
Ending .................................................................... $ 7,966,929 $ 7,589,600 $ 5,155,930
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits ........................................................ $ 4,593,971 $4,397,371 $3,846,582
Income taxes ................................................................ $ 878,315 $ 710,876 $ 653,175
Interest on borrowed funds .................................................. $ 813,272 $ 567,002 $ 298,320

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Other assets acquired in settlement of loans ................................ $ 225,546 $ 193,200 $ 84,544
Principal payments on ESOP loan ............................................. $ 53,571 $ 53,571 $ 53,571
Common stock issued to effect stock split ................................... -- $ 7,593 $ 7,495

</TABLE>

BLACKHAWK BANCORP 9 ANNUAL REPORT 1996

<PAGE> 27

Blackhawk Bancorp, Inc. and Subsidiary
INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Blackhawk Bancorp, Inc. and Subsidiary
Beloit, Wisconsin

We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of Blackhawk Bancorp, Inc. and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended; and in our
report dated February 7, 1997, we expressed an unqualified opinion on those
consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed
consolidated financial statements is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.

[SIGNATURE]

Lindgren, Callihan, Van Osdol & Co., Ltd.
Rockford, Illinois
February 7, 1997

BLACKHAWK BANCORP 10 ANNUAL REPORT

<PAGE> 28

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

The following discussion provides additional analysis of the financial
statements presented in the Company's annual report and should be read in
conjunction with this information. This discussion focuses on the significant
factors which affected the Company's earnings in 1996, with comparisons to 1995
and 1994 where applicable. As of December 31, 1996, Blackhawk State Bank (the
"Bank") was the only direct subsidiary of the Company and its operations
contributed nearly all of the revenue and expenses for the year. The Bank's
wholly owned subsidiary, Nevahawk Investment, Inc. ("Nevahawk") is an
investment subsidiary located in Nevada.

OVERVIEW
As of December 31, 1996, total assets of the Company were $151.5
million decreasing 2.6% from $155.5 million as of December 31, 1995. Total
income for 1996 was $1.73 million or $.73 per share, increasing 17.4% from
$1.47 million or $.64 per share, in 1995, which was 57.2% greater than the
$940,000 or $.41 per share, in 1994. The significant items resulting in the
above-mentioned results are discussed below.

NET INTEREST INCOME
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on a tax-equivalent basis, which
accounts for income earned on securities that are not fully subject to federal
taxes. Net interest income in 1996 was a record $6.0 million, increasing 7.8%
over the 1995 level of $5.6 million which in turn was 6.3% over the 1994 net
interest income of $5.3 million. Net interest income as a percentage of
average earning assets was 4.33% in 1996, 4.27% in 1995, and 4.19% in 1994.

Increases in investment income and income and fees on loans were the largest
factor in the increase of net interest income in 1996. Investment income
increased 11.9% and income and fees on loans increased 5.4%. Nearly all of the
increase in these areas were the result of increased volumes. The average
balance of investments increased by 9.6% in 1996 compared to 1995. Total loans
increased 3.3% for this same period. Commercial and consumer loans continued
to increase in their percentage of the total loan portfolio. Real estate
loans continued to decline as a percent of the portfolio. However, real estate
loans still make up over 57% of the portfolio.

The largest factor in the increase in net interest income from 1994 to 1995 was
income and fees on loans. During 1995, loan income and fees increased 14.5%,
due almost equally to both increased rates and volumes. Loan demand for 1995
was very strong due to an easing in national interest rates along with a
strong local economy. Outstanding commercial loans, including both variable
and fixed rate, increased by 24.2%, in 1995 while the rate earned on these
balances also increased. Outstanding balances for real estate loans remained
static while the rates earned increased. Consumer loan rates remained static
while outstanding balances increased 17.8%. It has been a strategy of the
Company, since its conversion to a commercial bank charter in 1990, to change
the mix of its loan portfolio by increasing the volume of commercial and
consumer loans.

During 1994 the Bank began to offer its own credit card product. During 1995
the Bank also began to offer a home equity line of credit. Balances in both of
these accounts continue to grow in 1996 as consumers become more comfortable
using these financing alternatives. With time these products will contribute a
higher level of interest income.

Securities income increased 4.4%, in 1995 over 1994 levels. The increase in
1995 was due to increased rates, which were partially offset by decreased
volumes in securities.

Interest paid on interest bearing liabilities increased 6.2% in 1996 compared
to 1995. Approximately 84% of the increase was due to increased volume in
short-term borrowings. These borrowings were in the form of repurchase
agreements. The increased cost of interest bearing deposits was due to
increased rates. Interest paid on interest bearing liabilities increased 20.2%
in 1995 as compared to 1994. The rate increases seen in assets, as discussed
above also affect liabilities. Interest paid on interest bearing deposits
increased 14.8% in 1995 as compared to 1994. The largest factor was the
increase in rates paid, and to a lesser extent due to increased volumes.

In order to fund loan demand and leverage its capital base, the Company has
taken advances from the Federal Home Loan Bank ("FHLB") and accepted
repurchase agreements from local municipalities. As specific commercial loan
funding requests come in, FHLB advances are taken to fund these loans. The
repurchase agreements are on a bid basis with varying periods for rebid.
Long-term loans are not funded with repurchase agreements. Also, short-term
borrowings include federal funds purchased. As short-term liquidity needs
arise, the Company may buy federal funds, secure advances from the FHLB, or
borrow from the Federal Reserve Bank.

NONINTEREST INCOME AND
NONINTEREST EXPENSE
Excluding security gains, noninterest income increased by $246,000, or 32.3%
in 1996 compared to 1995. The areas accounting for this increase were trust
fees, $34,000 or 38.7%, service fees, $101,000 or 21.6%, gain on sale of loans,
$37,000 or 98.4%, credit card fees, $15,000 or 23.3% and investment center
commissions, $60,000.

Overall noninterest income, excluding security gains, increased

BLACKHAWK BANCORP 11 ANNUAL REPORT 1996
<PAGE> 29

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

$162,000 or 27.1% in 1995 as compared to 1994. Increased service charges
account for approximately half of this increase and result primarily from the
replacement of several of the Company's product offerings with fee based
accounts. Also contributing to the additional income are a 19.6% increase in
trust fees, and a 36.7% increase in credit card fees in 1995. An investment
center selling non-FDIC insured products was opened in the Bank in 1995.
Because this was in its start-up phase, it did not contribute a material amount
to non-interest income.

Noninterest expense increased $185,000 or 4.6% in 1996 compared to 1995.
Increases in salaries, employee benefits, data processing and other expenses
were partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.

Salaries increased $127,000 or 7.8% in 1996 compared to 1995. This increase
was the result of additional new employees hired in 1995, normal salary
increases and an increase in the officer incentive compensation related to
improved financial performance. The increase in employee benefits of $79,000
or 22.2%, is primarily the result of increased health insurance costs. The
other major area of increase was other expenses which increased $121,000 or
20.3%. Two areas that accounted for approximately 54.0% of this increase were
office supplies and postage.

A significant decrease in FDIC premiums of $125,000, was due to the elimination
of premiums for banks that were most highly rated. The $33,000, 8.7%,
reduction in equipment expenses was primarily the result of reduced
depreciation costs.

Noninterest expense decreased $186,000 or 4.4% in 1995 as compared to 1994.
Increases in salaries and benefits, occupancy and equipment expenses, were
offset by decreases in loan collection expenses, FDIC premiums and expenses
related to the 1994 resignation of the Company's former President and CEO.

The bank has received the required regulatory approvals to open its second
in-store branch, which will occur in July 1997. This branch will be located in
a newly constructed Wal-Mart Superstore. Noninterest expenses are expected to
increase as a result of this branch opening.

Salaries and benefits increased 5.9%, or $112,000 in 1995. The primary
contributing factor was the full year of salaries related to the Company's
supermarket branch opened in November, 1994. Also affecting the increase was
the hiring of a full-time marketing officer and investment center executive,
normal adjustments in base salaries for personnel and higher officer incentive
compensation related to improved financial performance. These increases were
partially offset by a decrease in health insurance expense as a result of
changing carriers and 1994 also included costs related to the resignation of
the Company's former President and CEO.

Occupancy expense increased $61,000 or 25.5% in 1995. This was mostly due to
expenses related to the new addition to the Bank's main facility and to a
lesser extent, the addition of a new supermarket branch, opened in November,
1994. Equipment expenses increased $86,000 or 29.1% in 1995. Again, most of
this increase is attributable to the main bank and new branch additions. Also
affecting the increase is the higher depreciation expense related to the new
computer system installed in February, 1994.

Data processing expense decreased $92,000 or 23.6% in 1995. The computer
system installed during 1994 allows more flexibility in processing and also
lowered the cost of data processing services. Loan collection expense
decreased in 1995 by $121,000 or 71.1%. This is mostly due to the legal
expenses incurred in 1994, related to the restructuring of a large
non-performing commercial loan. FDIC premiums in 1995 decreased $112,000 or
46.8%. The FDIC's tiered schedule of premiums was lowered during 1995 to $.06
per hundred dollars from $.23 per hundred dollars of deposits.

Management tracks three ratios related to noninterest income and expense: (1)
Net-noninterest expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net-noninterest expense as a
percentage of average assets has improved from 2.70% in 1994 to 2.31% in 1995
to 2.15% in 1996. The standard efficiency ratio (noninterest expense divided by
net operating income) improved from 73.7% to 64.3% to 60.8%. The gross
efficiency ratio (noninterest expense divided by gross income) improved from
42.4% to 35.5% to 34.2%. Management expects all three of these ratios to
improve in the future, although at a slower rate of improvement.

PROVISION FOR LOAN LOSSES
The provision for loan losses was $145,000, $180,000, and $220,000 for 1996,
1995, and 1994, respectively. In 1996 the Bank experienced net recoveries of
$112,000 compared to net charge-offs of $65,000 and $347,000 in 1995 and 1994
respectively. The net recovery in 1996 resulted from recoveries of $221,000
off-setting charge-offs of $109,000. Most of the recovery was from a loan that
was originally charged off in 1994. Excluding the large recovery, net
charge-offs to average loans would have been .07% in 1996. Net charge-offs to
average loans was .07% in 1995 and .40% in 1994. The allowance for loan losses
as a percent of loans was 1.19% at December 31, 1996 compared to .98% and .91%
in 1995 and 1994, respectively. Management feels that the allowance for loan
loss provision is adequate based upon the current portfolio and market
conditions. As the loan portfolio shifts and market conditions warrant, the
provision will be adjusted.

BLACKHAWK BANCORP 12 ANNUAL REPORT 1996

<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

INCOME TAXES
The effective income tax rate increased to 32.9% in 1996 from 29.0% in 1995 and
26.9% in 1994. Because Nevahawk is located in Nevada, its income is not
subject to state income tax. As a result, as a higher proportion of income is
earned outside of Nevada, the effective rate increases.

BALANCE SHEET ANALYSIS
Total assets as of December 31, 1996 were $151.5 million versus $155.5 million
as of December 31, 1995, a decrease of 2.6%. Total average assets were $148.7
million for the year ended December 31, 1996 versus $140.6 million in 1995, an
increase of 5.8%. All comparisons below are comparing 1996 to 1995, unless
otherwise noted.

LOANS
Gross loans increased 5.2% to $99.4 million from $94.5 million. Commercial
loans experienced the most growth, $2.7 million or 13.3%, as the Bank continues
to restructure its balance sheet, during 1996, to that of a more traditional
commercial bank. Total real estate loans remained static. Consumer
installment loans increased $2.3 million or 13.0%. As mentioned above the Bank
began its own credit card program in 1994 and in 1995 introduced its home
equity line of credit. The credit card program and the home equity line of
credit have experienced solid growth considering the Bank's late entry into
these markets. As of December 31, 1996, real estate loans represented 57.8% of
gross loans, commercial loans were 23.2% and consumer loans were 19.7%. This
compares to 60.2%, 21.5% and 18.3%, respectively, at December 31, l995. The
Bank's loan mix is now closer to that of the average commercial bank, which has
been a goal since 1990.

NON-PERFORMING LOANS
Non-performing loans as a percent of total loans increased to 1.15 % as of
December 31, 1996 versus .61% as of December 31, 1995. The increase from 1995
to 1996 is the result of the change in loan mix discussed above. Management
feels that the risks involved with these loans are manageable and monitor this
area closely. It is the Bank's policy to place a loan on non-accrual once it
has become 90 days delinquent. If it is determined that collection is
questionable before that time, it would then be placed on non-accrual.

SECURITIES
Securities as a percent of average assets increased to 27.1% from 25.6%. The
percentage held in the form of tax-exempt securities increased slightly in
1996, 11.9% compared to 11.5%. As the yield relationship between taxable and
tax-exempt securities changes, new investments will be made in the area that
best meets the objectives of the Company.

Total earning assets were 93.0% of total average assets as of December 31,
1996, as compared to 92.6% as of December 31, 1995. In total dollars, earning
assets increased $8.2 million or 6.3%.

DEPOSITS
Total average interest bearing deposits increased .7%, to $97.0 million from
$96.3 million. They decreased as a percentage of average assets to 65.2% in
1996 from 68.5% in 1995. Interest bearing demand deposits experienced a 20.0%
increase to $4.9 million as compared to $4.1 million, and were 3.3% of average
assets in 1996, as compared to 2.9% in 1995. The majority of this increase was
in the Bank's club checking account programs. Savings accounts increased 7.7%.
Time deposits decreased 3.5% or $2.3 million, and as a percent of average
assets decreased to 41.7% in 1996 from 45.7% in 1995.

Total average non-interest bearing demand deposits increased 15.3% and as a
percentage of average assets were 9.2% in 1996 versus 8.5% in 1995. This
increase is mostly the result of increased business customers, which is also
evident in the commercial loan activity. As banks continue to find it
difficult to retain the more traditional type of savings customers, the focus
will be building relationships with its customers and offering alternative
investment products around the core checking account. The Bank's mix of
deposits is still undergoing a change to that of a traditional commercial bank
which began in 1990. Thus it is expected that a higher percentage of the
Bank's growth will be seen in demand deposit accounts than in traditional time
deposit and savings accounts.

OTHER BORROWINGS
Other borrowings has experienced the most growth of any other area of interest
bearing liabilities. Average borrowings increased 45.1% in 1996 after an
increase of 48.1% in 1995. Average borrowings of $15.2 million in 1996 were
10.2% of average assets compared to $10.5 million and 7.4% of average assets in
1995. The Bank has used other borrowings to fund specific loan requests by
taking advances at the FHLB to match the term and spread required. The Bank
also utilized advances from the FHLB to meet some short-term liquidity needs
and it also utilized a staggered maturity advance to fund some consumer lending
in 1995. The advances taken for short-term liquidity needs and those used to
fund the consumer loans have been retired as they have matured.

During 1995, the Bank entered into depository relationships with four local
governmental agencies. As a result, excess funds deposited into their accounts
are invested into repurchase agreements ("repos") on a daily basis. These repo
balances will fluctuate during the year as tax dollars are collected and
disbursed. These relationships are bid on a two-year cycle, though one of the
four is on a three-year cycle. Two of the relationships that are on a two year
cycle expire at the end of June

BLACKHAWK BANCORP 13 ANNUAL REPORT 1996

<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

1997. The other one expires at the end of December. These accounts are
expected to be rebid approximately three months prior to the expiration date.
It is not possible to determine the outcome of these bids at this time.

ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate risk
to the degree that its interest-bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest-earning assets. Interest rate risk occurs when there is an imbalance
between the interest-earning assets and the interest-bearing liabilities at a
given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets
than liabilities maturing or repricing within the same time frame, and a
negative gap is one in which there are more liabilities than assets maturing
or repricing within the same time frame. Accordingly, in a negative gap
position, the Bank's net interest income is likely to decline during periods of
rising interest rates and increase during periods of declining interest rates.
The opposite is true in the case of a positive gap position. The Bank's
cumulative one-year gap generally has been and currently is negative.

The asset/liability committee meets regularly to monitor and determine the
Bank's exposure to interest rate fluctuations. This is done by monitoring the
maturity and repricings of assets and liabilities plus monitoring the flow of
funds. It is current bank policy to have the one year cumulative gap within a
positive or negative 10% of assets. The current percentage is negative 11.7%
which compares to a positive 4.2% as of December 31, 1995.

LIQUIDITY
Liquidity as it relates to the Bank is a measure of its ability to fund loans
and withdrawals of deposits in a cost-effective manner. The Bank's principal
sources of funds are deposits, scheduled amortization and prepayment of loan
principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fed funds, sale of loans,
sale of securities, borrowing from the Federal Reserve Bank and the FHLB and
capital loans. Current year earnings can be paid to the Bank, from Nevahwk, to
provide additional liquidity, without incurring a tax liability under present
law. During 1996 Nevahawk did not pay a dividend however, a dividend of $1.0
million was paid to the Bank in 1995. A payment in 1997 is not anticipated.

Generally liquidity needs of the Company consist of payment of dividends to its
stockholders and a limited amount of expenses. The sources of funds to provide
this liquidity are income from securities, maturities of securities, cash
balances and dividends from the Bank. Certain restrictions are imposed upon
the Bank which could limit its ability to pay dividends if it did not have net
earnings in the future. The Company maintains adequate liquidity to pay its
expenses. The Company has entered into an agreement to purchase Rochelle
Bancorp Inc., the parent of Rochelle Savings Bank, Rochelle, Illinois. The
closing of this transaction is expected to be completed April 30, 1997. The
funds, totaling approximately $4.2 million, needed to complete this transaction
are expected to be generated internally by the Company and by the dividends
from the Bank.

CAPITAL
Total stockholders' equity as of December 31, 1996 increased 3.9% to $22.0
million as compared to $21.2 million as of December 31, 1995. Internal growth
in the form of increased net income was the biggest factor for this increase.
Also contributing to the increase to a lesser extent was the exercising of
stock options by employees and an increase in the adjustment for Financial
Accounting Standard 115. Equity as a percent of assets, core capital as a
percent of assets, total capital as a percent of risk based assets and leverage
ratio were 14.54%, 14.37%, 23.47%, and 15.08 %, respectively, at December 31,
1996. The Company significantly exceeds all regulatory requirements regarding
capital. The regulatory requirement for core capital as a percent of assets is
5.50% and total capital as a percent of risk based assets is 4.0%.

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

ACCOUNTING DEVELOPMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement No.
123, Accounting for Stock-Based Compensation. This statement establishes
financial accounting and reporting standards for such plans including
arrangements by which employees or non-employees receive shares of stock or
other equity instruments or the company incurs liabilities to employees based
on the price of the stock such as stock options. Under this statement, the
stock or equity instruments issued must be accounted for based on the fair
value of the considera-

BLACKHAWK BANCORP 14 ANNUAL REPORT 1996

<PAGE> 32

tion received or the fair value of the equity instrument issued,
whichever is more reliably measured. As an alternative to valuing such
instruments at fair value, the employer can continue to account for these under
the previous method of accounting. If the previous method of accounting is
chosen in lieu of the fair value method, as the company has done, the Company
must disclose the effects of the fair value for equity awards granted in fiscal
years beginning after December, 31,1994. There is no material effect on the
financial statements in implementing this statement.

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

QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
1996 1995
(dollars in thousands except for per share data) Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Interest income...................................... $2,867 $2,849 $2,839 $2,768 $2,748 $2,706 $2,608 $2,520
Interest expense..................................... 1,314 1,342 1,375 1,363 1,314 1,353 1,269 1,143
------------------------------------------------------------------------
Net interest income.................................. 1,553 1,507 1,464 1,405 1,434 1,353 1,339 1,377
Provision for loan losses............................ 25 35 40 45 45 45 45 45
Other income......................................... 267 249 255 235 240 213 189 136
Other expense........................................ 1,070 1,060 1,040 1,044 1,070 1,004 979 979
------------------------------------------------------------------------
Income before income taxes........................... 725 661 639 551 559 517 504 489
Applicable income taxes.............................. 238 221 210 179 119 165 163 154
------------------------------------------------------------------------
Net income........................................... $487 $440 $429 $372 $440 $352 $341 $335
========================================================================
Per share data: (1)
Earnings............................................. $0.20 $0.19 $0.18 $0.16 $0.19 $0.15 $0.15 $0.15
Dividends............................................ 0.10 0.10 0.10 0.08 0.08 0.08 0.07 0.07
Stock price ranges (2)..........-high................ 13.50 11.50 10.50 10.75 13.00 13.25 11.50 11.33
-low................ 10.88 10.50 11.75 12.00 11.00 11.00 8.67 8.67
Book value per share................................. 9.64 9.50 9.39 9.35 9.28 9.15 9.08 8.96
</TABLE>

(1) Per share data is based on the number of shares outstanding plus an
adjustment for options exercisable at the end of the periods indicated.
Restated for a 3 for 2 stock split, June 15, 1995.
(2) Prices obtained from D.T.N. Quotes. These prices are bid and ask prices,
which do not represent actual transactions.
Restated for a 3 for 2 stock split, June 15, 1995.

BLACKHAWK BANCORP 15 ANNUAL REPORT 1996
<PAGE> 33
BOARD OF DIRECTORS

<TABLE>
<S> <C> <C>
[Photo of] [Photo of] [Photo of]
JESSE L. CALKINS JOHN B. CLARK DENNIS M. CONERTON
Senior Vice President , Treasurer, Senior Vice President President, Chief Executive Officer
Chief Financial Officer Everen Securities, Inc Blackhawk State Bank
Blackhawk State Bank

[Photo of] [Photo of] [Photo of] [Photo of]
Dr. H. DANIEL GREEN CHARLES HART KENNETH A. HENDRICKS JAMES P. KELLEY
Dentist President President, Chief Executive Officer Executive Vice President, Secretary
Combined Insurance Group, Ltd ABC Supply Co., Inc Blackhawk State Bank

[Photo of] [Photo of] [Photo of]
FRED G. KLETT GEORGE D. MERCHANT ROGER K. TAYLOR
Sales Representative Retired Businessman President, Chief Executive Officer
The Prudential Life Insurance Co. North American Tool Corporation

</TABLE>

BLACKHAWK STATE BANK OFFICERS:

DENNIS M. CONERTON, President, CEO - JAMES P. KELLEY, Executive Vice President
- - - JESSE L. CALKINS, Senior Vice President
RICHARD J. RUSCH, Vice President, Commercial Lending - EDMAR J. HANSEN, Vice
President, Retail Lending
LARRY L. KANE, Assistant Vice President - SHARON A. BURNETT, Assistant Vice
President - KAY M. HANSEN, Consumer Loan Officer
DEANNA R. WINEGAR, Branch Manager, Retail Banking Officer - DEBRA L. OVIST,
Consumer Loan Officer
RICK L. NELSON, Assistant Vice President - DOROTHY L. BURTON, Trust
Officer - TIMOTHY J. RYAN, Assistant Vice President, Controller
ALLEN J. BREWER, Assistant Vice President, Retail Banking

BLACKHAWK BANCORP 16 ANNUAL REPORT 1996

<PAGE> 34

BUSINESS BANKING ACCOUNT & CREDIT SERVICES:

<TABLE>
<S> <C> <C>
COMMERCIAL CHECKING ACCOUNTS CREDIT SERVICES INTERNATIONAL BANKING SERVICES
CASH MANAGEMENT SERVICES LINES OF CREDIT SAFE DEPOSIT BOXES
ZERO BALANCE DISBURSEMENT ACCOUNTS TERM LOANS MONEY ORDERS & CASHIERS CHECKS
CONTROLLED DISBURSEMENT ACCOUNTS EQUIPMENT, FIXED ASSET LOANS TRAVELERS CHEQUES
PAYROLL SERVICES REVOLVING CREDIT CORPORATE CREDIT CARDS
LOCK BOX SERVICES LETTERS OF CREDIT EMPLOYEE RETIREMENT ACCOUNTS
ACCOUNT RECONCILIATION RECEIVABLES FINANCING
FINE SORT CHECK RETURN
MONEY MARKET INVESTMENT SERVICES
ACCESS 2,000 ACH ORIGINATION
</TABLE>

PERSONAL BANKING PRODUCTS AND SERVICES:

<TABLE>
<S> <C> <C>
CLUB CHECKING LOANS FULL SERVICE TRUST DEPARTMENT
SAVINGS PLANS HOME MORTGAGES INVESTMENT CENTER
MASTERMONEY HOME IMPROVEMENT 24 HOUR ATM BANKING
PASSBOOK ACCOUNTS HOME EQUITY VISA & MASTERCARD
STATEMENT SAVINGS AUTO & RV SAFE DEPOSIT BOXES
CERTIFICATES OF DEPOSIT BOATS, MOTORCYCLES, CAMPERS TRAVELER'S CHEQUES
HEALTHCARE CERTIFICATES EDUCATION (STUDENT LOANS) SPECIAL NEED CHECKS
MONEY MARKET ACCOUNTS BUSINESS MONEY ORDERS
IRA ACCOUNTS CERTIFIED CHECKS
NOW ACCOUNTS CASHIERS CHECKS
CHRISTMAS CLUBS BANK DRAFTS
WIRE TRANSFERS
BANK BY MAIL
</TABLE>

FORM 10-KSB
THE CORPORATION`S ANNUAL REPORT ON FORM 10-KSB, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS AVAILABLE UPON REQUEST TO:
BLACKHAWK BANCORP, INC., P.O. BOX 719, BELOIT, WI 53512-0719