SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

               QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended                                                  June 30, 1999

Commission file number                                                   0-18166

                      STATE FINANCIAL SERVICES CORPORATION
             (Exact name of registrant as specified in its charter)



           WISCONSIN                                     39-1489983
(State or other jurisdiction of             (I.R.S. Employer identification No.)
 incorporation or organization)



           10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
              (Address and Zip Code of principal executive offices)

                                 Not applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)


                                 (414) 425-1600
              (Registrant's telephone number, including area code)

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

    As of August 10, 1999, there were 9,852,897 shares of Registrant's $0.10 Par
    Value Common Stock outstanding.



<PAGE>



                                    FORM 10-Q

                      STATE FINANCIAL SERVICES CORPORATION

                                      INDEX


                         PART I - FINANCIAL INFORMATION


                                                                        Page No.

Item 1.         Financial Statements (Unaudited)

                Consolidated Balance Sheets as of
                June 30, 1999 and December 31, 1998                           2

                Consolidated Statements of Income for the
                Three Months ended June 30, 1999 and 1998                     3

                Consolidated Statements of Income for the
                Six Months ended June 30, 1999 and 1998                       4

                Consolidated Statements of Cash Flows for the
                Six Months ended June 30, 1999 and 1998                       5

                Notes to Consolidated Financial Statements                    6

Item 2.         Management's Discussion and Analysis of
                Financial Condition and Results of Operations                10



                           PART II - OTHER INFORMATION

Items 1-6                                                                    21

Signatures                                                                   23


<PAGE>




                                                        29

Part I.         Financial Information
Item 1.         Financial Statements

STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)

<TABLE>
<CAPTION>

                                                                                      June 30,                December 31,
                                                                                        1999                      1998
                                                                                ---------------------     ---------------------
<S>                                                                                   <C>                        <C>
ASSETS
  Cash and due from banks                                                                 34,285,654             $  31,028,203
  Federal funds sold                                                                      12,523,713                 8,508,387
  Other short-term investments                                                             2,100,000                12,900,000
   Interest-earning deposits                                                              12,961,406                29,793,241
                                                                                ---------------------     ---------------------
  Cash and cash equivalents                                                               61,870,773                82,229,831

Investment securities:
  Held-to-maturity (fair value $6,493,718  - June 30, 1999
      and $10,479,402 - December 31, 1998)                                                 6,414,291                10,290,241
  Available for sale (at fair value)                                                     206,365,224                94,704,827

  Loans (net of allowance for loan losses of $6,962,955 -June 30,
      1999 and $4,484,504 -December 31, 1998)                                            717,655,232               607,948,900

  Premises and equipment                                                                  20,730,935                13,333,369
  Accrued interest receivable                                                              4,680,637                 4,485,332
  Other assets                                                                            38,304,624                15,376,023
                                                                                ---------------------     ---------------------
                                                                  TOTAL ASSETS        $1,056,021,716             $ 828,368,523
                                                                                =====================     =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits:
    Demand                                                                               114,117,918                81,540,940
    Savings                                                                              411,151,952               199,266,311
    Money market                                                                         153,272,661               120,297,093
    Other time                                                                           150,620,408               251,800,542
                                                                                ---------------------     ---------------------
                                                                TOTAL DEPOSITS           829,162,939               652,904,886

  Notes payable                                                                           10,000,000                 6,750,000
  Securities sold under agreements to repurchase                                          11,302,529                 4,116,677
  Federal Home Loan Bank advances                                                         50,000,000                25,000,000
  Accrued expenses and other liabilities                                                   4,020,734                 3,270,762
  Federal funds purchased                                                                 12,400,000                         0
  Accrued interest payable                                                                 3,548,387                 1,688,920
                                                                                ---------------------     ---------------------
                                                             TOTAL LIABILITIES           920,434,589               693,731,245

Stockholders' equity:
    Preferred stock, $1 par value; authorized--100,000 shares;
       issued and outstanding--none
    Common stock, $0.10 par value; authorized--10,000,000 shares
       issued and outstanding--10,086,214 shares in 1999
       and 10,076,017 in 1998                                                              1,008,621                 1,007,601
    Capital surplus                                                                       94,851,596                94,153,564
    Accumulated other comprehensive income                                                  (598,528)                1,080,549
    Retained earnings                                                                     45,457,046                43,748,273
    Less:  Guaranteed ESOP obligation                                                     (5,131,608)               (5,352,709)
                                                                                ---------------------     ---------------------
                                                    TOTAL STOCKHOLDERS' EQUITY           135,587,127               134,637,278
                                                                                ---------------------     ---------------------
                                    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $1,056,021,716             $ 828,368,523
                                                                                =====================     =====================
</TABLE>

See notes to unaudited consolidated financial statements.


                                       2
<PAGE>

<TABLE>
<CAPTION>


STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)

                                                                                         Three months ended June 30,
                                                                                        1999                      1998
                                                                                ---------------------     ---------------------
<S>                                                                                      <C>                       <C>
INTEREST INCOME:
  Loans, including fees                                                                  $12,785,135               $12,156,541
  Investment securities:
    Taxable                                                                                1,679,557                 1,827,096
    Tax-exempt                                                                               386,853                   318,198
  Federal funds sold                                                                          95,074                   112,640
                                                         TOTAL INTEREST INCOME            14,946,619                14,414,475
                                                                                ---------------------     ---------------------

INTEREST EXPENSE:
  Deposits                                                                                 5,606,650                 6,248,636
  Notes payable and other borrowings                                                         787,331                   152,194
                                                                                ---------------------     ---------------------
                                                        TOTAL INTEREST EXPENSE             6,393,981                 6,400,830
                                                                                ---------------------     ---------------------
                                                           NET INTEREST INCOME             8,552,638                 8,013,645

Provision for loan losses                                                                    172,500                   172,500
                                                                                ---------------------     ---------------------
                                                     NET INTEREST INCOME AFTER
                                                     PROVISION FOR LOAN LOSSES             8,380,138                 7,841,145

OTHER INCOME:
  Service charges on deposit accounts                                                        505,717                   469,497
  Merchant service fees                                                                      365,485                   308,633
  Building rent                                                                               56,523                    72,542
  ATM fees                                                                                   181,974                   185,512
  Security transaction commissions                                                           129,595                    93,050
  Asset management fees                                                                      149,526                         0
  Gains on sale of loans                                                                     211,632                   218,913
  Investment security gains                                                                  537,206                   205,131
  Other                                                                                      199,297                   164,157
                                                                                ---------------------     ---------------------
                                                            TOTAL OTHER INCOME             2,336,955                 1,717,442

OTHER EXPENSES:
  Salaries and employee benefits                                                           3,108,884                 3,153,998
  Net occupancy expense                                                                      318,569                   291,060
  Equipment rentals, depreciation and maintenance                                            720,304                   703,684
  Data processing                                                                            496,050                   475,978
  Legal and professional                                                                     271,040                   307,456
  Merchant service charges                                                                   266,376                   239,736
  ATM charges                                                                                182,859                   159,877
  Advertising                                                                                241,765                   224,848
  Goodwill amortization                                                                      179,471                   144,980
  Other                                                                                    1,026,036                 1,021,812
                                                                                ---------------------     ---------------------
                                                          TOTAL OTHER EXPENSES             6,811,354                 6,723,429

                                                    INCOME BEFORE INCOME TAXES             3,905,739                 2,835,158
Income taxes                                                                               1,406,216                 1,007,090
                                                                                ---------------------     ---------------------
                                                                    NET INCOME           $ 2,499,523               $ 1,828,068
                                                                                =====================     =====================

 Basic earnings per common share (see Note B)                                            $      0.26               $      0.19
 Diluted earnings per common share (see Note B)                                                 0.26                      0.19
 Dividends per common share                                                                     0.12                      0.12

</TABLE>

See notes to unaudited consolidated financial statements.

                                       3

<PAGE>


<TABLE>

STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>

                                                                                          Six months ended June 30,
                                                                                        1999                      1998
                                                                                ---------------------     ---------------------

<S>                                                                                      <C>                       <C>
INTEREST INCOME:
  Loans, including fees                                                                  $24,963,579               $24,121,096
  Investment securities:
    Taxable                                                                                3,246,644                 3,558,604
    Tax-exempt                                                                               748,478                   628,445
  Federal funds sold                                                                         247,790                   348,880
                                                                                ---------------------     ---------------------
                                                         TOTAL INTEREST INCOME            29,206,491                28,657,025

INTEREST EXPENSE:
  Deposits                                                                                11,261,400                12,442,285
  Notes payable and other borrowings                                                       1,434,111                   315,882
                                                                                ---------------------     ---------------------
                                                        TOTAL INTEREST EXPENSE            12,695,511                12,758,167
                                                                                ---------------------     ---------------------
                                                           NET INTEREST INCOME            16,510,980                15,898,858

Provision for loan losses                                                                    345,000                   345,000

                                                     NET INTEREST INCOME AFTER
                                                     PROVISION FOR LOAN LOSSES            16,165,980                15,553,858

OTHER INCOME:
  Service charges on deposit accounts                                                        982,457                   907,178
  Merchant service fees                                                                      681,399                   618,575
  Building rent                                                                              126,034                   142,228
  ATM fees                                                                                   348,212                   360,174
  Security transaction commissions                                                           247,302                   182,838
  Asset management fees                                                                      299,654                         0
  Gains on sale of loans                                                                     417,504                   375,894
  Investment security gains                                                                  745,911                   407,189
  Other                                                                                      332,690                   343,344
                                                                                ---------------------     ---------------------
                                                            TOTAL OTHER INCOME             4,181,163                 3,337,420

OTHER EXPENSES:
  Salaries and employee benefits                                                           6,063,477                 6,510,218
  Net occupancy expense                                                                      644,490                   611,639
  Equipment rentals, depreciation and maintenance                                          1,449,393                 1,415,175
  Data processing                                                                          1,035,179                   958,561
  Legal and professional                                                                     510,558                   704,010
  Merchant service charges                                                                   494,798                   459,679
  ATM charges                                                                                327,876                   305,265
  Advertising                                                                                419,564                   454,129
  Goodwill amortization                                                                      357,160                   285,440
  Merger-related charge                                                                      598,292                         0
  Other                                                                                    1,828,774                 1,870,129
                                                                                ---------------------     ---------------------
                                                          TOTAL OTHER EXPENSES            13,729,561                13,574,245
                                                    INCOME BEFORE INCOME TAXES             6,617,582                 5,317,033
Income taxes                                                                               2,591,004                 1,888,726
                                                                                ---------------------     ---------------------
                                                                    NET INCOME           $ 4,026,578               $ 3,428,307
                                                                                =====================     =====================

Basic earnings per common share                                                          $      0.42               $      0.36
 Diluted earnings per common share (see Note B)                                                 0.42                      0.35
 Dividends per common share (see Note B)                                                        0.24                      0.24

</TABLE>

See notes to unaudited consolidated financial statements.


                                       4
<PAGE>



STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>

                                                                                          Six months ended June 30,
                                                                                        1999                      1998
                                                                                ---------------------     ---------------------
<S>                                                                                     <C>                       <C>
OPERATING ACTIVITIES
  Net income                                                                            $  4,026,578              $  3,428,307
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Provision for loan losses                                                              345,000                   345,000
      Provision for depreciation                                                             733,948                   771,232
      Amortization of investment security
        premiums and accretion of discounts-net                                               59,862                    97,854
      Amortization of goodwill                                                               357,160                   285,440
      Market adjustment for committed ESOP shares                                            598,291                   346,011
      Cost of Recognition and Retention Plan                                                       0                   449,824
      Increase in interest receivable                                                       (195,305)                 (323,625)
      Decrease in interest payable                                                          (885,533)                   (1,643)
      Realized investment security gains-net                                                (745,911)                 (407,189)
      Other decrease (increase)                                                              775,981                 (150,134)
                                                                                ---------------------     ---------------------
                                     NET CASH PROVIDED BY OPERATING ACTIVITIES             5,070,071                 4,841,077
INVESTING ACTIVITIES
  Purchases of investment securities                                                               0                         0
  Maturities of investment securities                                                      3,851,750                 4,149,132
  Purchases of securities available for sale                                             (23,552,501)              (29,624,009)
  Maturities of securities available for sale                                             13,109,137                 9,346,083
  Sales of securities available for sale                                                   2,733,543                 9,251,675
  Net decrease (increase) in loans                                                      ( 24,112,885)              (15,836,869)
  Purchases of premises and equipment                                                     (1,647,466)                 (224,836)
  Business acquisitions (net of cash and cash equivalents
    acquired of $7,721,000 in 1999)
    Loans                                                                                (85,938,447)                        0
    Investment securities available-for-sale                                            (105,550,000)                        0
    Premises and equipment                                                                (6,484,048)                        0
    Goodwill                                                                             (19,079,446)                        0
    Deposits                                                                             184,989,394                         0
    Federal funds purchased                                                                6,000,000                         0
    Securities sold under agreement to repurchase                                            945,000                         0
    Other                                                                                   (856,727)                        0
                                                                                ---------------------     ---------------------
                                         NET CASH USED BY INVESTING ACTIVITIES           (55,583,696)              (22,938,824)
FINANCING ACTIVITIES
  Increase (decrease) in deposits                                                         (8,731,341)               14,776,722
  Repayment of notes payable                                                              (6,750,000)               (4,400,000)
  Proceeds of notes payable                                                               10,000,000                         0
  Decrease in guaranteed ESOP obligation                                                     221,101                   268,349
  Net proceeds from securities sold under agreement to repurchase                          6,231,852                 4,975,979
  Increase (decrease) in Federal Home Loan Bank Advances                                  25,000,000                (5,000,000)
  Proceeds from federal funds purchased                                                    6,400,000                   150,000
  Cash dividends                                                                          (2,317,806)               (2,268,480)
  Proceeds from exercise of stock options                                                    100,761                   184,473
                                                                                ---------------------     ---------------------
                                     NET CASH PROVIDED BY FINANCING ACTIVITIES            30,154,567                 8,669,043
                                                                                ---------------------     ---------------------
DECREASE IN CASH AND CASH EQUIVALENTS                                                    (20,359,058)               (9,428,704)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          82,229,831                80,584,884
                                                                                ---------------------     ---------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                              $ 61,870,773              $ 71,156,180

Supplemental information:
  Interest paid                                                                         $ 13,581,044              $ 12,749,810
  Income taxes paid                                                                        2,207,500                 2,204,000
</TABLE>


See notes to unaudited consolidated financial statements.


                                       5
<PAGE>



STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 1999


NOTE A--BASIS OF PRESENTATION

       The accompanying  unaudited consolidated financial statements include the
accounts of State Financial Services Corporation (the "Company" or ("State") and
its  subsidiaries - State  Financial Bank  (Wisconsin),  State  Financial Bank -
Waterford  ("Waterford"),  State Financial  Mortgage Company,  Richmond Bancorp,
Inc. ("Bancorp") Lokken, Chesnut and Cape ("LCC"), Home Federal Savings and Loan
Association of Elgin ("Home"),  and First Waukegan  Corporation  ("FWC").  State
Financial  Bank also  includes the  accounts of its wholly  owned  subsidiaries,
Hales Corners Development  Corporation and Hales Corners Investment Corporation.
Waterford also includes the accounts of its wholly owned  subsidiary,  Waterford
Investment  Corporation.  Bancorp also includes the accounts of its wholly owned
subsidiaries,  State Financial Bank  (Illinois,  "Richmond") and State Financial
Investments,  Inc.  Richmond  also  includes  the  accounts of its wholly  owned
subsidiary,  State Financial  Insurance Agency. FWC includes the accounts of its
wholly  owned  subsidiary,   Bank  of  Northern  Illinois,   N.A.  ("BNI").  All
significant intercompany balances and transactions have been eliminated.

       The accompanying  unaudited  consolidated  financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included.  Interim operating results are not necessarily  indicative of the
results that may be expected for the year. For further information, refer to the
consolidated   financial  statements  and  footnotes  thereto  included  in  the
Company's annual report to stockholders for the year ended December 31, 1998.

NOTE B - EARNINGS PER SHARE

       Basic  earnings  per share is  computed  by  dividing  net  income by the
weighted-average  common shares  outstanding less unearned ESOP shares.  Diluted
earnings  per share is computed by dividing  net income by the  weighted-average
common  shares  outstanding  less  unallocated  ESOP  shares  plus  the  assumed
conversion of all potentially  dilutive  securities.  The  denominators  for the
earnings per share amounts are as follows:

<TABLE>
<CAPTION>

                                                       For the three months ended            For the six months ended
                                                       June 30,          June 30,           June 30,           June 30,
                                                         1999              1998               1999               1998
                                                   ----------------- ------------------ ------------------ -----------------
<S>                                                      <C>                <C>                <C>               <C>
Basic:
Weighted-average number of
 shares outstanding                                      10,084,852         10,156,262         10,082,321        10,118,171
Less: weighted-average number
of unearned ESOP shares                                    (445,696)          (530,300)          (416,268)         (506,389)
                                                   ----------------- ------------------ ------------------ -----------------

Denominator for basic earnings per share                  9,639,156          9,625,962          9,666,053         9,611,782
                                                   ================= ================== ================== =================

Fully diluted:
Denominator for basic earnings per share                  9,639,156          9,625,962          9,666,053         9,611,782
Add: assumed conversion of  stock options using
the treasury stock method                                    19,411            118,595             18,068           138,758
                                                   ================= ================== ================== =================

Denominator for fully diluted
 earnings per share                                       9,658,567          9,744,557          9,684,121         9,750,540
                                                   ================= ================== ================== =================
</TABLE>



                                       6
<PAGE>



NOTE C--ACQUISITIONS

       On June 23, 1999,  the Company  completed its cash  acquisition  of First
Waukegan  Corporation and its subsidiary,  Bank of Northern  Illinois,  N.A. The
acquisition  was  recorded as a  purchase.  Application  of purchase  accounting
requires the inclusion of FWC's and BNI's operating  results in the consolidated
statements of income from the date of acquisition.  Accordingly, FWC's and BNI's
operating  results  for the  period  June 23,  1999  through  June 30,  1999 are
included in the  Company's  consolidated  statements of income for the three and
six months ended June 30, 1999. FWC and BNI's financial condition is included in
the  Company's  consolidated  balance  sheets dated June 30, 1999.  No operating
results of FWC and BNI are included in the Company's consolidated  statements of
income  for the three and six months  ended June 30,  1998.  The  allocation  of
purchase price to premises and equipment is based on preliminary  valuations and
will be adjusted upon completion of appraisals in the third quarter.

       On a pro forma basis, total income,  net income,  basic and fully diluted
earnings per share for the three and six months ended June 30, 1998 and June 30,
1999,  after giving  effect to the  acquisition  of FWC as if it had occurred on
January 1, 1998 and January 1, 1999 are as follows:
<TABLE>
<CAPTION>

                                           For the six            For the six         For the six         For the six
                                           months ended           months ended        months ended        months ended
                                          June 30, 1999          June 30, 1998        June 30, 1999       June 30, 1998
                                       -------------------- --------------------- -------------------- --------------------
<S>                                            <C>                   <C>                 <C>                   <C>
Total income                                   $40,998,394           $40,604,667         $ 20,970,203          $20,322,028
Net income                                       1,478,146             2,881,595              235,105            1,534,370
Basic earnings per share                       $      0.15           $      0.30         $       0.03          $      0.16
Diluted earnings per share                     $      0.15           $      0.30         $       0.03          $      0.16
                                       -------------------- --------------------- -------------------- --------------------
</TABLE>

       On September 8, 1998,  the Company  completed its  acquisition of LCC, an
asset management firm located in LaCrosse,  Wisconsin. The Company purchased the
outstanding  common  stock of LCC in exchange  for 113,241  shares of its common
stock valued at $21.19 per share on the transaction  date. An additional  28,310
shares of common  stock may be issued on January 31, 2002 subject to LCC meeting
or exceeding certain operating  performance targets in 1999, 2000, and 2001. The
acquisition  was  recorded as a  purchase.  Application  of purchase  accounting
requires the inclusion of LCC's operating results in the consolidated statements
of income from the date of acquisition. Accordingly, LCC's operating results for
the period  January 1, 1999 through June 30, 1999 are included in the  Company's
consolidated  statements  of income for the three and six months  ended June 30,
1999.  LCC's  financial  condition  is  included in the  Company's  consolidated
balance sheets dated June 30, 1999. No operating  results of LCC are included in
the  Company's  consolidated  statements  of income for the three and six months
ended June 30,  1998.  Pro forma data to include  LCC  financial  results is not
presented as the effect is immaterial.

       Home  was  a  business  combination  consummated  on  December  15,  1998
accounted for as a pooling-of-interests. Accordingly, the financial position and
results of operations  and cash flows of the Company and Home have been restated
as though the companies were combined for all historical periods.

NOTE D - COMPREHENSIVE INCOME

       Statement  of  Financial   Accounting   Standards  No.  130,   "Reporting
Comprehensive  Income  establishes   standards  for  reporting  and  display  of
comprehensive  income  and  its  components  in  a  complete  set  of  financial
statements.  Comprehensive  income is the total of  reported  net income and all
other  revenues,  expenses,  gains and  losses  that  under  generally  accepted
accounting  principles  are  not  includable  in  reported  net  income  but are
reflected in shareholders' equity. The standard permits the statement of changes
in  shareholders'  equity to be used to satisfy its  requirements  and  requires
companies  to report  comparative  totals  for  comprehensive  income in interim
reports.

                                       7
<PAGE>

<TABLE>
<CAPTION>

                                               For the three months ended                 For the six months ended
                                             June 30,             June 30,              June 30,             June 30,
                                               1999                 1998                  1999                 1998
                                       -------------------- -------------------- --------------------- --------------------

<S>                                             <C>                  <C>                   <C>                  <C>
Net income                                      $ 2,499,523          $ 1,828,068           $ 4,026,578          $ 3,428,307
Other comprehensive income
Change in unrealized securities
gains (losses), net of tax                       (1,004,179)             (99,908)           (1,225,638)             (85,622)
Reclassification adjustment for
     realized gains included in
     net income                                    (537,206)            (205,131)             (745,911)            (407,189)
Estimated income tax on
    realized securities gains                       210,638               80,432               292,472              159,659
                                       -------------------- -------------------- --------------------- --------------------

Total comprehensive income                      $ 1,168,776          $ 1,603,461           $ 2,347,501          $ 3,095,155
                                       ==================== ==================== ===================== ====================
</TABLE>

NOTE E--SEGMENT INFORMATION

       The Company evaluates segment  performance for each subsidiary  financial
institution,  which is  differentiated  primarily by  geographic  location.  The
Company has five reportable  segments:  State Financial Bank (Wisconsin),  State
Financial  Bank -  Waterford,  State  Financial  Bank  (Illinois),  Home Federal
Savings and Loan Association of Elgin, and Bank of Northern Illinois, N.A.. Each
institution  provides a full range of retail and  commercial  banking  services.
Additionally,  State Financial Bank (Illinois)  provides insurance and brokerage
services.

       Management evaluates the after-tax  performance of each of the subsidiary
financial  institutions on that institution's actual earning assets,  nonearning
assets, and funding sources.  Each subsidiary financial  institution has its own
net interest  income,  provision  for loan  losses,  other  income,  noninterest
expense and income tax  provision  as captured by the  institution's  accounting
systems.  The "all other" category includes  primarily the results of the parent
company and Lokken,  Chesnut & Cape.  Intercompany and other amounts,  which are
included in "all other" are not material.

       The following  tables  contain  profit (loss)  statements for each of the
subsidiary  financial  institutions  for the six months  ended June 30, 1999 and
1998.

<TABLE>
<CAPTION>
                                                        For the six months ended June 30, 1999

                                                                    Home Federal
                             State         State         State      Savings and     Bank of
                           Financial     Financial      Financial       Loan        Northern
                              Bank        Bank -          Bank       Association    Illinois,       All
                          (Wisconsin)    Waterford     (Illinois)     of Elgin       N.A.          Other       Consolidated
                          --------------------------------------------------------------------------------------------------
<S>                       <C>            <C>           <C>          <C>            <C>           <C>          <C>
Interest income           $ 10,268,800   $ 1,893,906   $ 2,823,907  $ 13,808,031   $    354,679  $   57,168   $   29,206,491
Interest expense             3,902,775       848,182     1,287,008     6,689,812        140,170    (172,436)      12,695,511
----------------------------------------------------------------------------------------------------------------------------
Net interest income          6,366,025     1,045,724     1,536,899     7,118,219        214,509     229,604       16,510,980
Provision for loan losses      150,000        15,000       120,000        60,000              0           0          345,000
----------------------------------------------------------------------------------------------------------------------------
Net interest income after
 provision for loan          6,216,025     1,030,724     1,416,899     7,058,219        214,509     229,604       16,165,980
losses                       1,869,769       181,054       475,105       837,370         52,685     765,180        4,181,163
Other income                         0             0             0       598,292              0           0          598,292
Merger-related charges
Other noninterest
 expense                     4,849,550       893,770     1,932,838     4,660,825        158,790     635,496       13,131,269
                          --------------------------------------------------------------------------------------------------
Income (loss) before
 income taxes                3,236,244       318,008       (40,834)    2,636,472        108,404     359,288        6,617,582
Income taxes                 1,013,182        91,716        38,339     1,254,644         27,717     165,406        2,591,004
                          --------------------------------------------------------------------------------------------------
Net income (loss)         $  2,223,062   $   226,292  ($    79,173) $  1,381,828   $     80,687  $  193,882   $    4,026,578
                          ==================================================================================================

Total assets              $285,634,077   $53,555,120   $75,712,065  $392,815,591   $240,140,581  $8,164,282   $1,056,021,716
                          ==================================================================================================

</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                        For the six months ended June 30, 1998
                          --------------------------------------------------------------------------------------------------
                                                                              Home Federal
                                  State            State                      Savings and
                                Financial     Financial Bank      State           Loan
                                  Bank               -        Financial Bank  Association of      All
                               (Wisconsin)       Waterford     (Illinois)         Elgin          Other       Consolidated
                          --------------------------------------------------------------------------------------------------

<S>                             <C>              <C>             <C>            <C>             <C>            <C>
Interest income                 $ 10,449,777     $ 1,888,904     $ 3,289,185    $ 13,023,327    $    5,832     $ 28,657,025
Interest expense                   4,357,665         914,040       1,840,916       5,622,403        23,143       12,758,167
----------------------------------------------------------------------------------------------------------------------------
Net interest income                6,092,112         974,864       1,448,269       7,400,924       (17,311)      15,898,858
Provision for loan losses            150,000          15,000         120,000          60,000             0          345,000
----------------------------------------------------------------------------------------------------------------------------
Net interest income after
 provision for loan losses         5,942,112         959,864       1,328,269       7,340,924       (17,311)      15,553,858
Other income                       1,740,561         175,222         553,398         513,432       354,807        3,337,420
Other noninterest
 expense                           4,685,114         905,909       1,784,400       5,891,727       307,095       13,574,245
                          --------------------------------------------------------------------------------------------------
Income before income taxes         2,997,559         229,177          97,267       1,962,629        30,401        5,317,033
Income taxes                         930,931          69,646          90,359         761,128        36,243        1,888,307
                          --------------------------------------------------------------------------------------------------
Net income (loss)               $  2,066,628     $   159,531     $     6,908    $  1,201,501   ($    5,842)    $  3,428,726
                          ==================================================================================================

Total assets                    $270,947,201     $53,513,083     $91,397,408    $367,656,466    $2,051,451     $785,565,609
                          ==================================================================================================
</TABLE>

NOTE F - STOCK REPURCHASE PROGRAM

       On June 15,  1999,  the  Company's  Board  of  Directors  authorized  the
repurchase  of up to 15% or  approximately  1.5 million  shares of the Company's
common stock.  The Company  commenced the stock  repurchase  program on July 19,
1999. Through August 6, 1999, the Company has repurchased  234,612 shares of its
common  stock at an  average  price of $17.08  per  share.  The  234,612  shares
represents 2.33% of total shares outstanding as of June 30, 1999. Once aggregate
repurchases reach 10% of the Company's total common stock  outstanding,  Federal
Reserve  approval  will be necessary to continue  the  repurchase  up to the 15%
target level.

NOTE G - SHAREHOLDER RIGHTS PLAN

       On July 27, 1999, the Company's Board of Directors  adopted a Shareholder
Rights Plan which includes the  declaration of a dividend of one Preferred Share
Purchase Right (the "Right") on each  outstanding  share of the Company's common
stock.  The issuance of the rights will be made to  shareholders of record as of
the close of business on August 27, 1999. After the dividends,  each outstanding
share of the Company's common stock will have attached thereto one Right.

       The Rights are designed to provide additional  protection against abusive
takeover tactics such as partial tender offers,  selective open-market purchases
and offers  for all the  shares of the  Company at less than full value or at an
inappropriate  time.  The  Rights  are  intended  to  assure  that the  Board of
Directors has the ability to protect shareholders and the Company if efforts are
made to  gain  control  of the  Company  in a  manner  that  is not in the  best
interests of the Company and all of its  shareholders.  The Rights are not being
distributed  in  response  to any  specific  effort to  acquire  control  of the
Company, and the Board is not aware of any such effort.

       The Rights will be exercisable  only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer,  consummation of
which  would  result  in  ownership  by a person  or group of 15% or more of the
Common  Stock.  Each  Right  will  initially  entitle  shareholders  to buy  one
one-thousandth  share of the  Company's  Class A Preferred  Stock at an exercise
price of $70 per one one-thousandth share, subject to adjustment.  If any person
becomes a 15% or more  shareholder  of the Company,  each Right will entitle its
holder to  purchase,  at the Rights  then-current  exercise  price,  a number of
common  shares of the Company or of the  acquiror  having a market  value at the
time of twice the Right's exercise price.

       The Rights  are  designed  to permit  shareholders  to  benefit  from the
long-term  value of the  Company and to aid in  assuring  that all  shareholders
receive fair and equal  treatment  in the event of any proposed  takeover of the
Company.  The  Rights  will  expire  on July 27,  2009,  subject  to  extension.
Distribution of the Rights is not taxable to shareholders.


                                       9
<PAGE>



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Changes in Financial Condition

       At  June  30,  1999,  total  assets  were   $1,056,022,000   compared  to
$828,369,000  at December 31,  1998,  an increase of  $227,653,000.  On June 23,
1999, the Company  completed its acquisition of FWC and its banking  subsidiary,
BNI, in a purchase transaction.  FWC and BNI added $240,141,000 to the Company's
consolidated  total assets.  The total purchase price for FWC was $27,565,000 in
cash and the assumption of $2,404,000 in preferred  stock and $3,718,000 of debt
outstanding  at FWC. At closing,  the Company  redeemed the preferred  stock and
retired FWC's debt. The Company funded the acquisition from internal sources and
through $10,000,000 in notes drawn on its line of credit.

       Other  significant  uses of funds  during  the first  six  months of 1999
consisted  of  $24,113,000  in  net  loan   increases,   $8,731,000  in  deposit
contraction,  $6,750,000  in  debt  retirement,  $3,858,000  in  net  investment
securities  purchases,  $2,318,000 in cash dividend payments,  and $1,647,000 in
fixed asset additions. Net loan increases resulted from increased loan demand in
the first six months of 1999,  as well as new loan  products  introduced at Home
subsequent  to the merger.  Exclusive  of the BNI  acquisition,  total  deposits
decreased during the first six months of 1999 mainly due to cyclical declines in
demand and savings  balances.  Fixed  asset  purchases  were  mainly  related to
computer  enhancements  as the Company  upgraded its systems in preparation  for
Richmond's and Elgin's  conversion to the Company's data service provider in May
and July,  respectively.  In addition to the aforementioned  $10,000,000 line of
credit advance,  additional funding came from a $25,000,000  increase in Federal
Home Loan Bank  Advances,  $28,080,000 in cash and cash  equivalent  contraction
(exclusive  of the  $7,721,000  in cash  and  equivalents  acquired  with  FWC),
$6,400,000  in  additional  federal funds  purchased,  a $6,232,000  increase in
securities sold under agreements to repurchase,  $5,070,000 in net cash provided
by  operating  activities,  $221,000 in ESOP loan  repayments,  and  $101,000 in
proceeds from exercised stock options.

       State reported asset contraction at each of its banking operations except
State Financial Bank (Wisconsin) from December 31, 1998 to June 30, 1999, mainly
due to  seasonal  contraction  in savings  and demand  deposits.  Broken down by
reporting segments,  total assets increased $6.3 million at State Financial Bank
(Wisconsin) and decreased $7.3 million at State Financial Bank - Waterford, $7.7
million  at  State  Financial  Bank  (Illinois),   and  $4.6  million  at  Home.
Additionally,  the FWC  acquisition  added  $240.1  million in assets to State's
consolidated  footings.  State  reported net loans of $717.6 million at June 30,
1999, an increase of $109.7 million over December 31, 1998, which included $85.9
million in loans  acquired  with FWC.  Exclusive of the  acquisition,  net loans
increased $23.8 million or 3.9% mainly due to increased mortgage originations at
Home and loan  growth  at SFB and SFWB.  Total  deposits  at June 30,  1999 grew
$176.3  million  including  $185.0 million  acquired with FWC.  Exclusive of the
acquisition, total deposits at June 30, 1999 decreased $8.7 million or 1.3% from
December 31, 1998.  Total  stockholders'  equity  increased to $135.6 million at
June 30, 1999 from $134.6 million at December 31, 1998 earnings retention net of
dividends,  offset by reductions  in the value of securities  available for sale
over the preceding twelve months.

Asset Quality

       At June 30, 1999,  non-performing assets were $7,969,000,  an increase of
$1,059,000  from March 31, 1999.  The BNI  acquisition  added  $2,541,000 to the
Company's   non-performing   assets  at  June  30,   1999.   Exclusive  of  BNI,
non-performing  assets  decreased  $1,482,000  due to a  $1,262,000  decrease in
non-performing   loans  and  $220,000  decrease  in  other  real  estate.  Total
non-performing assets as a percentage of total assets increased to 0.47% at June
30,  1999  from  0.46%  at  March  31,  1999  due  to  the  inclusion  of  BNI's
non-performing assets. As a percentage of total loans outstanding,  the level of
non-performing loans increased to 0.65% at June 30, 1999 from 0.56% at March 31,
1999 due to the inclusion of BNI's  non-performing  loans in the Company's  June
30, 1999 consolidated numbers.

       At June  30,  1999,  available  information  regarding  additional  loans
totaling approximately $770,000,  causes management to have serious doubts as to
the ability of such borrowers to comply with present loan repayment terms.

       The  following  table  summarizes  non-performing  assets  on  the  dates
indicated (dollars in thousands).


                                       10
<PAGE>


<TABLE>
<CAPTION>


                                                        Jun. 30       Mar. 31         Dec 31       Sep. 30        Jun. 30
                                                           1999          1999           1998          1998           1998
                                                   -----------------------------------------------------------------------

<S>                                                <C>            <C>           <C>            <C>           <C>
Nonaccrual loans.................................. $      4,701   $     2,904   $      3,245   $     2,681   $      3,151
Accruing loans past due 90 days or more...........           18           546            106           436            118
Restructured loans................................            0             0              0             0              0

Total non-performing and restructured loans               4,719         3,450          3,351         3,117          3,269

Other real estate owned...........................          250           460            572           347            234

Total non-performing assets....................... $      4,969   $     3,910   $      3,923         3,464          3,503

Ratios:
  Non-performing loans to total loans.............         0.65%         0.65%          0.55%         0.52%          0.56%
  Allowance to non-performing loans...............       147.55        133.68         133.84        143.95         137.42
  Non-performing assets to total assets...........         0.47          0.46           0.47          0.43           0.45
                                                   =======================================================================
</TABLE>

       When,  in the  opinion  of  management,  serious  doubt  exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time a
loan is classified as nonaccrual, interest income accrued in the current year is
reversed  and  interest  income  accrued  in the prior  year is  charged  to the
allowance for loan losses.  The Company does not generally  recognize  income on
loans past due 90 days or more.

Allowance for Loan Losses and Net Charge-offs

       Management maintains the allowance for loan losses (the "Allowance") at a
level  considered  adequate to provide for future loan losses.  The Allowance is
increased by provisions  charged to earnings and is reduced by charge-offs,  net
of recoveries.  At June 30, 1999, the Allowance was  $6,962,000,  an increase of
$2,478,000  from the balance at December 31, 1998. Of this increase,  $2,228,000
was due to  additional  allowance  acquired  with BNI.  The  remaining  $250,000
increase  in the  allowance  was  due to  loan  loss  provisions  exceeding  net
charge-offs at the other four banks through the first six months of 1999.

       The  allowance  for loan  losses is  composed  of  specific  and  general
valuation  allowances.  The Company establishes specific valuation allowances on
income-producing  real estate loans  considered  impaired.  A loan is considered
impaired (and a specific valuation allowance  established for an amount equal to
the  impairment)  when the carrying amount of the loan exceeds the present value
of the expected future cash flows,  discounted at the loan's original  effective
interest rate, or the fair value of the underlying collateral.

       General  valuation  allowances  are based on an evaluation of the various
risk components that are inherent in the credit portfolio.

       The risk components that are evaluated include past loan loss experience;
the level of nonperforming and classified assets,  current economic  conditions,
volume,  growth and composition of the loan portfolio,  adverse  situations that
may  affect  the  borrower's  ability  to  repay;  the  estimated  value  of any
underlying  collateral;  peer group comparisons;  regulatory guidance; and other
relevant factors.  The allowance is increased by provisions  charges to earnings
and reduced by charge-offs, net of recoveries.  Management may transfer reserves
between specific and general valuation allowances as considered  necessary.  The
adequacy of the allowance for loan losses is approved quarterly by the Company's
board of directors.  The allowance  reflects  management's  best estimate of the
reserves needed to provide for the impairment of commercial and income-producing
real estate loans, as well as other credit risks of the subsidiary  banks and is
based on a risk model  developed and  implemented  by management and approved by
the Company's board of directors.

         The determination of Allowance  adequacy is determined  quarterly based
upon an evaluation of the Company's  loan  portfolio by the internal loan review
officer  and  management.  These  evaluations  consider  a variety  of  factors,
including, but not limited to, general economic conditions,  loan portfolio size
and composition,  previous loss experience,  the borrower's financial condition,
collateral  adequacy,  the  level  of  non-performing  loans,  and  management's
estimation


                                       11
<PAGE>


of future losses.  As a percentage of loans, the Allowance was 0.96% at June 30,
1999 compared to 0.73% at December 31, 1998. Based upon its analyses, management
considers the Allowance adequate to recognize the risk inherent in the Company's
loan portfolio at June 30, 1999.

       The following table sets forth an analysis of the Company's Allowance and
actual loss experience for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>

                                                       Six months
                                                         ended                  Year ended
                                                     June 30, 1999            Dec. 31, 1998
                                               ---------------------------------------------------

<S>                                               <C>                      <C>
Balance at beginning of period                    $            4,485       $            4,370
Charge-offs:
   Commercial ...........................                         14                      146
   Real estate ..........................                         20                       39
   Installment ..........................                        120                      465
   Other ................................                         42                      149
                                               ---------------------------------------------------
   Total charge-offs ....................                        196                      799
                                               ---------------------------------------------------
Recoveries:
   Commercial ...........................                         35                       79
   Real estate ..........................                          2                       59
   Installment ..........................                         53                       60
   Other ................................                         11                       26
                                               ---------------------------------------------------
   Total recoveries .....................                        101                      224

Net charge-offs .........................                         95                      575
Balance of acquired allowance
    at date of acquisition ..............                      2,228                        0
Additions charged to operations .........                        345                      690
                                               ---------------------------------------------------
Balance at end of period ................         $            6,963       $            4,485
                                               ===================================================
Ratios:
   Net charge-offs to
     average loans outstanding 1 ........                       0.03 %                   0.10 %
  Net charge-offs to total allowance 1...                       2.73                    12.82
  Allowance to period end
     loans outstanding ..................                       0.96                     0.73
                                               ===================================================
         1.       Annualized
</TABLE>

       Net  charge-offs  to average loans  outstanding  decreased to 0.03% on an
annualized  basis  compared  to 0.10%  for the year  ended  December  31,  1998.
Annualized  1999  commercial  loan  charge-offs  declined  mainly  due to  fewer
charge-offs  at SFB  and  SFBR in the  first  six  months  of  1999.  Annualized
installment  loan  charge-offs  declined in the first six months of 1999 as SFBR
incurred fewer write-offs on its indirect subprime auto loan portfolio.  SFBR is
no longer  engaged in  subprime  auto  lending.  The  remaining  outstanding  on
subprime auto loans at SFBR is immaterial.  The level of other loan  charge-offs
in 1998 was  primarily  impacted by credit  card  losses.  The Company  sold its
credit card portfolio in July,  1998 to an unrelated  third party.  Accordingly,
losses from credit card lending, classified with other loan charge-offs, were no
longer incurred.

Results of  Operation -  Comparison  of the Three Months Ended June 30, 1999 and
1998

General

       For the quarter ended June 30, 1999,  the Company  reported net income of
$2,500,000,  a $671,000  (36.7%)  increase from the $1,828,000  reported for the
quarter  ended June 30, 1998.  Increased  net interest  income and  non-interest
income were the main reasons for this improvement.


                                       12
<PAGE>



Net Interest Income

       The following table sets forth average balances,  related interest income
and expenses, and effective interest yields and rates for the three months ended
June 30, 1999 and June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>

                                                            1999                             1998
                                                   --------------------------------------------------------------

                                                   Average              Yield/        Average             Yield/
                                                   Balance   Interest    Rate4        Balance    Interest Rate4
                                                   --------------------------------------------------------------
<S>                                                <C>         <C>        <C>       <C>          <C>       <C>
    ASSETS
    Interest-earning assets:                                   12,815
      Loans 1,2,3                                  $638,129    .118,1     8.05%     $  577,358   $ 12,188  8.47  %
      Taxable investment securities                  79,237    58,611     5.98          73,679      1,127  6.14
      Tax-exempt investment securities 3             35,187    ,937,0     6.68          24,042        482  8.04
      Other short-term investments                    9,281        00     5.12           7,426        108  5.82
      Interest-earning deposits                      29,416               5.18          43,318        592  5.48
      Federal funds sold                              7,435               5.13           8,182        113  5.52
                                                   --------------------------------------------------------------
    Total interest-earning assets                   798,685    15,176     7.62         734,005     14,610  7.98
    Non-interest-earning assets:
      Cash and due from banks                        26,560                            15,965
      Premises and equipment, net                    14,045                             6,655
      Other assets                                   22,719                            30,457
    Less: Allowance for loan losses                  (4,245)                          (4,450)

    TOTAL                                          $ 857,764                        $  782,632
                                                   ========                         ==========

    LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
  Now accounts                                     $ 93,321       386     1.66%     $   81,599        481   2.36%
  Money market accounts                             121,750     1,212     3.99         103,994      1,150   4.44
  Savings deposits                                  112,820       705     2.51         104,975        775   2.96
  Time deposits                                     251,738     3,304     5.26         265,106      3,843   5.81
  Notes payable                                         879        12     5.47             900         20   8.91
  FHLB borrowings                                    50,000       638     5.12               0          0   0.00
  Federal funds purchased                            1,297         18     5.57             180          3   6.70
  Securities sold under
    agreement to repurchase                           9,886       119     4.83           9,739        129   5.31
                                                   --------------------------------------------------------------
Total interest-bearing liabilities                  641,691     6,394     4.00         566,493      6,401   4.53
Non-interest-bearing liabilities:
  Demand deposits                                    74,350                             71,718
  Other                                               5,861                              9,185
                                                   --------
Total liabilities                                   721,902                            647,396
                                                   --------
Stockholders' equity                                135,862                             135,236
                                                   --------
TOTAL                                              $857,764                         $  782,632
                                                   ========                         ==========

Net interest earning and interest rate spread                   8,783     3.65%                  $  8,209   3.45%
                                                               =================                 ================

Net yield on interest-earning assets                                      4.41%                             4.49%
---------------------------------------------------                     ======                           ========
1.     For the purposes of these computations,  nonaccrual loans are included in
       the daily average loan amounts outstanding.
2.     Interest  earned on loans  includes  loan fees (which are not material in
       amount) and interest  income which has been received from borrowers whose
       loans were removed from nonaccrual during the period indicated.
3.     Taxable-equivalent  adjustments  are made in calculating  interest income
       and yields using a 34% rate for all years presented.
4.     Annualized

       For  the   quarter   ended   June  30,   1999,   the   Company   reported
taxable-equivalent net interest income of $8,783,000, an increase of $574,000 or
6.99% from the $8,209,000  reported for the quarter ended June 30, 1998.  Second
quarter 1999  taxable-equivalent net interest income included $215,000 from BNI.
Exclusive of the new  acquisition,  second quarter 1999  taxable-equivalent  net
interest  income  increased  $359,000  or 4.4% over  second  quarter  1998.  The
Company's  taxable-equivalent  yield on  interest-earning  assets (net  interest
margin)  declined to

                                       13
<PAGE>

4.41% in second  quarter  1999 from  4.49% in second  quarter  1998.  The margin
decline was mainly due to reduced loan yields  resulting  from  intense  pricing
competition and the general decline in interest rates over the preceding  twelve
months.

       Taxable-equivalent  total  interest  income  increased  $566,000  for the
quarter  ended  June 30,  1999  compared  to the second  quarter of 1998,  which
included $355,000 in interest income from BNI. The improvement, exclusive of BNI
was mainly due to volume increases in interest-earning assets over the preceding
twelve months. The Company reported a $64,680,000 or 8.8% increase in the volume
of average  interest-earning  assets in second  quarter 1999 over second quarter
1998.  The majority of this increase  came in average loan growth at Home,  SFB,
and SFBW  ($53,070,000)  over the preceding twelve months and increased  average
loan volume resulting from the inclusion of BNI's average loans  ($7,702,000) in
second  quarter 1999.  The general  decline in interest rates over the preceding
twelve months offset the positive volume impacts to the Company's total interest
income.  For the quarter ended June 30, 1999,  the Company's  taxable-equivalent
yield on interest-earning  assets fell to 7.62% from 7.98% for the quarter ended
June 30, 1998.  The Company's  second  quarter 1999 loan yield declined to 8.05%
from 8.47% in second quarter 1998. This decline was mainly due to the impacts of
intense loan pricing  competition  in the Company's  markets and maturing  loans
repricing into the comparatively lower interest rate environment  prevalent from
June,  1998  through  March,  1999.  Although  second  quarter  1999 yields were
comparatively lower than second quarter 1998, they represent an improvement from
the  7.51%  and  8.01%   reported  in  first  quarter  1999  for  the  Company's
taxable-equivalent  yield on interest-earning assets and taxable-equivalent loan
yield,  respectively.  The Company also  experienced  yield  contraction  in its
taxable and tax-exempt investment securities due to the reinvestment of maturing
investments proceeds into the lower rate environment  prevalent in the last half
of 1998 and the first quarter or 1999.  For the quarter ended June 30, 1999, the
yield  on  taxable  investment  securities  declined  to  5.98%  and  tax-exempt
investment  yields declined to 6.68% from 6.14% and 8.04%  respectively  for the
quarter ended June 30, 1998.

       Reduced  funding  costs  helped to offset the  impacts  of reduced  asset
yields in second quarter 1999. The cost of interest-bearing liabilities declined
to 4.00% for second  quarter 1999 from 4.53% for second quarter 1998. Due to the
general decline in market interest rates over the preceding  twelve months,  the
Company  reported a lower funding cost on each of its  interest-bearing  deposit
liabilities  in the second  quarter  1999. In fourth  quarter 1998,  the Company
adjusted  its pricing on certain NOW  accounts  and savings  deposits  given the
general  decline in  short-term  interest  rates.  As a result,  the cost of NOW
accounts  decreased to 1.66% in second quarter 1999 from 2.36% in second quarter
1998. Similarly, the repricing of savings deposits resulted in that deposit cost
falling to 2.51% in 1999 from 2.96% in 1998.  The cost of money market  accounts
fell to 3.99% in second  quarter  1999 from 4.44% in second  quarter 1998 mainly
due to the general  decline in  short-term  interest  rates over the last twelve
months.  Time deposit costs also fell to 5.26% in second quarter 1999 from 5.81%
in second quarter 1998 as maturing  instruments  repriced into the current lower
rate environment.  Additionally, in a lower interest rate environment, a greater
percentage of time deposit customers  typically move maturing balances into more
liquid deposit products,  primarily money market accounts,  as the yield pick-up
on fixed maturity deposits is comparatively less attractive. This is the primary
reason  the  Company   experienced  a  $36,368,000  decline  in  the  volume  of
outstanding  average time deposits and a  $17,756,000  increase in the volume of
average  money  market  accounts  in second  quarter  1999 as compared to second
quarter 1998. To help fund the increase in  average-interest  earning assets not
supported by deposit growth,  the Company relied more on FHLB borrowings to fund
asset growth in second quarter 1999. As a result,  time  deposits,  historically
the Company's highest significant funding cost, represented a smaller percentage
of the  Company's  total  interest-bearing  liabilities  in second  quarter 1999
compared to second  quarter 1998,  which helped to improve the Company's  second
quarter 1999 cost of funds.  Average time  deposits  comprised  39.2% of average
interest-bearing  liabilities in second quarter 1999 compared to 46.8% in second
quarter 1998.


Provision for Loan Losses

       The provision for loan losses in second  quarter 1999 and second  quarter
1998 remained unchanged at $172,500 in each period.

Other Income

       Total other income increased  $619,000 in second quarter 1999 over second
quarter 1998. The inclusion of LCC's and BNI accounted for $150,000 and $53,000,
respectively,  of this  increase.  Exclusive  of LCC & BNI,  total other  income
increased  $416,000 due to increases in investment  securities  gains,  merchant
services  income,  service


                                       14
<PAGE>

charges on deposit accounts, security transaction commissions,  and other income
offset by  reductions in rent income,  gains from  mortgage loan sales,  and ATM
fees. For the quarter ended June 30, 1999, investment securities gains increased
$332,000. Home realized a $252,000 investment securities gain as its ATM service
provider  was sold to a  competitor.  The  remaining  increase in the  Company's
second quarter investment  securities gains came from sales of marketable equity
securities owned by the Company. Merchant income increased $57,000 due to volume
increases at each of the banks.  Services charges on deposit accounts  increased
$36,000  mainly due to  adjustments  in Home's  pricing  and  handling of checks
returned for insufficient  funds and the inclusion of BNI. Security  transaction
commissions increased $37,000 due to volume increases in brokerage activities at
SFB and Richmond and the  introduction  of these  services at Home in the second
quarter of 1999.  Other income  increased  $35,000 in second quarter 1999 due to
increases in cashier check and insurance  commissions  and the inclusion of BNI.
Offsetting these improvements were declines in rent income,  gains from mortgage
loan sales, and ATM fees in second quarter 1999. Rent income  decreased  $16,000
as the Company  assumed space  previously  leased to outside  tenants.  Gains on
mortgage loan sales decreased $7,000 due to lower mortgage origination volume in
second quarter 1999 compared to second quarter 1998. ATM fees declined $4,000 in
second quarter 1999 due to slightly lower volume in foreign  transactions at the
Company's terminals.

Other Expenses

       Total other expenses increased $88,000 in second quarter 1999 over second
quarter 1998,  which included  $337,000 in expenses  related to the inclusion of
LCC's  and  BNI's  non-interest  expenses  in the  Company's  1999  consolidated
operating results.  Exclusive thereof,  non-interest expenses decreased $249,000
or 3.7%  due  mainly  to lower  costs  for  personnel,  professional  fees,  and
occupancy  costs.  Personnel  costs  decreased  $45,000 as stated  and  $229,000
exclusive of LCC and BNI,  mainly due to  efficiencies  realized from the merger
with Home and reduced health  insurance costs. The Company produced this overall
improvement  in  personnel  expense  while  adding  four  FTE's at Home in first
quarter 1999 to introduce  commercial  and consumer  lending to Home's  markets.
Legal and professional  fees declined $36,000 as stated and $44,000 exclusive of
LCC and BNI due to efficiencies  realized from the Home merger.  Occupancy costs
increased  $28,000 as stated which included $49,000 in additional  expenses from
LCC and BNI. Exclusive of these new acquisitions, second quarter occupancy costs
decreased $21,000.  Offsetting the  aforementioned  improvements in non-interest
expenses  were  increased  expenses  for  data  processing  ($20,000),  merchant
services  ($27,000).  Data processing  increased  mainly due to fees incurred at
Richmond in its  conversion to the  Company's  data service  provider.  Merchant
services expense increased due to volume increases and rate adjustments from the
Company's service provider.

Income Taxes

       Income taxes for the quarter ended June 30, 1999 increased  $399,000 on a
$1,071,000  increase in income before income taxes. The Company's  effective tax
rate for second  quarter 1999 was 36.0% compared to 35.5% for the second quarter
of 1998. The slightly higher effective tax rate in 1999 was primarily related to
a lower percentage of tax-exempt income in 1999 compared to 1998.


Results of Operation - Comparison of the Six Months Ended June 30, 1999 and 1998

General

       For the six months ended June 30, 1999,  the Company  reported net income
of  $4,026,000,  a $598,000  increase over the  $3,428,000  reported for the six
months ended June 30, 1998.  Included in 1999's operating results was a $598,000
additional  merger-related  charge stemming from the Company's merger with Home.
This charge resulted solely from the dissolution of Home's ESOP in first quarter
1999.  Exclusive  of this  charge,  net income for the six months ended June 30,
1999 were $4,625,000,  a 34.9% increase over the six months ended June 30, 1998.
Increased net interest income and non-interest  income and reduced  non-interest
expenses, exclusive of the merger-related charge, were the main reasons for this
improvement.


                                       15
<PAGE>



Net Interest Income

       The following table sets forth average balances,  related interest income
and expenses,  and effective  interest yields and rates for the six months ended
June 30, 1999 and June 30, 1998 (dollars in thousands):

                                                                 1999                             1998
                                                        --------------------------------------------------------------

                                                        Average               Yield/        Average             Yield/
                                                        Balance   Interest     Rate4        Balance   Interest  Rate4
                                                        --------------------------------------------------------------
<S>                                                     <C>            <C>      <C>       <C>         <C>        <C>
    ASSETS
    Interest-earning assets:
      Loans 1,2,3                                       $  628,305     25,027   8.03%     $  571,216  $  24,178  8.54  %
      Taxable investment securities                         75,368      2,228   5.96          69,490      2,210  6.41
      Tax-exempt investment securities 3                    33,978      1,134   6.73          27,420        952  7.00
      Other short-term investments                          13,216        338   5.16           4,739        137  5.82
      Interest-earning deposits                             30,956        680   4.43          46,413      1,212  5.26
      Federal funds sold                                     9,900        248   5.05          12,605        349  5.58
                                                        --------------------------------------------------------------
    Total interest-earning assets                          791,723     29,655   7.55         731,883     29,038  8.00
    Non-interest-earning assets:
      Cash and due from banks                               26,759                            22,853
      Premises and equipment, net                           13,749                            13,645
      Other assets                                          21,239                            17,755
    Less: Allowance for loan losses                         (4,093)                           (4,439)
                                                        ----------                        ----------
    TOTAL                                               $  849,377                        $  781,697
                                                        ==========                        ==========

    LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
  Now accounts                                          $   93,706        780   1.68%     $   89,049        951  2.15%
  Money market accounts                                    127,110      2,404   3.81         105,560      2,352  4.49
  Savings deposits                                         110,095      1,357   2.49         106,663      1,523  2.88
  Time deposits                                            247,590      6,720   5.47         264,904      7,616  5.80
  Notes payable                                              1,598         63   7.95           1,115         44  7.96
  FHLB borrowings                                           45,833      1,096   4.82               0         16  0.00
  Federal funds purchased                                    2,016         51   5.10              90          3  6.70
  Securities sold under
    agreement to repurchase                                  9,406        224   4.80           9,587        253  5.32
                                                        --------------------------------------------------------------
Total interest-bearing liabilities                         637,354     12,695   4.02         576,967     12,758  4.46

Non-interest-bearing liabilities:
  Demand deposits                                           71,695                            63,271
  Other                                                      4,866                             6,626
                                                        ----------                        ----------
Total liabilities                                          713,915                           646,864
                                                        ----------                        ----------
Stockholders' equity                                       135,462                           134,833
                                                        ----------                        ----------
TOTAL                                                   $  849,377                        $  781,697
                                                        ==========                        ==========
Net interest earning and interest rate spread                          16,959   3.54%                    16,279  3.54%
                                                                       =============                     ============
Net yield on interest-earning assets                                            4.32%                            4.49%
----------------------------------------------------                         =======                           ======
1.     For the purposes of these computations,  nonaccrual loans are included in
       the daily average loan amounts outstanding.
2.     Interest  earned on loans  includes  loan fees (which are not material in
       amount) and interest  income which has been received from borrowers whose
       loans were removed from nonaccrual during the period indicated.
3.     Taxable-equivalent  adjustments  are made in calculating  interest income
       and yields using a 34% rate for all years presented.
4.     Annualized
</TABLE>

       The  Company   reported   taxable-equivalent   net  interest   income  of
$16,959,000  for the six months ended June 30, 1999,  an increase of $680,000 or
4.2% from the  $16,279,000  reported for the six months ended June 30, 1998. The
six months ended June 30, 1999  included  $215,000 in net  interest  income from
BNI. Exclusive  thereof,  net interest income improved $465,000 or 2.9% over the
six months  ended  June 30,  1998.  The  Company's  taxable-equivalent  yield

                                       16
<PAGE>

on  interest-earning  assets (net interest margin) declined to 4.32% for the six
months ended June 30, 1999 from 4.49% for the six months ended June 30,1998. The
margin  decline was mainly due to reduced  loan yields  resulting  from  intense
pricing competition and the general decline in interest rates in the second half
of 1998 and the first quarter of 1999.

       Taxable-equivalent  total interest income increased  $617,000 for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998, which
included $355,000 from BNI. Exclusive of the BNI acquisition, taxable-equivalent
total interest income  increased  $262,000 in the first six months of 1999. This
improvement was mainly due to volume increases in  interest-earning  assets over
the preceding  twelve  months.  The Company's  average  interest-earning  assets
increased  $59,840,000  or 8.2% for the first six months of 1999 compared to the
first  six  months of 1998.  Increases  in  average  outstanding  loan  balances
accounted for $57,090,000 of the increased  average  interest-earning  assets in
1999 due to loan volume increases at Home, SFB, and SFBW. Offsetting this volume
increase was a reduction in the Company's  yield on  interest-earning  assets in
1999.  For the six months ended June 30,  1999,  total  interest-earning  assets
yielded  7.55%  compared to 8.00% for the first six months of 1998 due mainly to
the general decline in interest rates during the last half of 1998 and the first
quarter of 1999.  The Company's  yield on loans  declined to 8.03% for the first
half of 1999 from 8.54% for the first half of 1998.  This decline was mainly due
to the impacts of intense loan pricing  competition in the Company's markets and
maturing loans repricing into the comparatively lower interest rate environment.
The Company also  experienced  yield  contraction  in its taxable and tax-exempt
investment  securities due to the reinvestment of maturing  investments proceeds
into the lower rate  environment.  For the six months ended June 30,  1999,  the
yield  on  taxable  investment  securities  declined  to  5.96%  and  tax-exempt
investment  yields declined to 6.73% from 6.41% and 7.00%  respectively  for the
six months ended June 30, 1998.

       Reduced  funding  costs  helped to offset the  impacts  of reduced  asset
yields in first half of 1999. The cost of interest-bearing  liabilities declined
to 4.02% for the six  months  ended June  30,1999  from 4.46% for the six months
ended June 30, 1998. On a year-to-date  basis, the Company  likewise  reported a
lower funding cost on each of its  interest-bearing  deposit  liabilities during
the first half of 1999. The cost of NOW accounts decreased to 1.68% in the first
six months of 1999 from 2.15% in the first six months of 1998.  Savings deposits
fell to 2.49% in 1999 from 2.88% in 1998. Reductions and NOW and savings funding
costs were  derived  from rate  reductions  enacted to these  products in fourth
quarter 1998. The cost of money market accounts fell to 3.81% in 1999 from 4.49%
in 1998 mainly due to the general decline in short-term  interest rates over the
last twelve months.  Time deposit costs also fell to 5.47% in 1999 from 5.80% in
1998 as maturing instruments repriced into the current lower rate environment. A
change in product mix also helped to improve the Company's  cost of funds during
the first six months of 1999. Time deposits,  historically the Company's highest
costing   significant   funding   cost,   comprised   38.8%  of  average   total
interest-bearing  liabilities  during the first six months of 1999  compared  to
45.9%  during  the first six  months of 1998.  Accordingly,  the  Company  had a
greater  percentage  of its 1999  average  funding  derived  from lower  costing
sources than in 1998.

Provision for Loan Losses

       The  provision for loan losses for the six months ended June 30, 1999 and
1998 remained unchanged at $345,000 in each period.

Other Income

       Total other  income  increased  $844,000 in the six months ended June 30,
1999 compared to the six months ended June 30, 1998.  The inclusion of LCC's and
BNI  accounted  for  $302,000  and  $53,000,  respectively,  of  this  increase.
Exclusive of LCC & BNI,  total other income  increased  $489,000 or 14.7% due to
increases in investment  securities  gains,  merchant  services income,  service
charges on deposit accounts, security transaction commissions, and gains on loan
sales offset by reductions in rent income,  gains from mortgage loan sales,  ATM
fees,  and other  income.  For the six months  ended June 30,  1999,  investment
securities  gains  increased  $338,000,  which  included the $252,000  gain Home
realized in second  quarter 1999 from the sale of its equity  investment  in its
ATM  service  provider.  The  remaining  increase  in the  Company's  investment
securities gains in 1999 came from sales of marketable  equity  securities owned
by the Company.  Merchant income  increased  $63,000 due to volume  increases at
each of the banks. Services charges on deposit accounts increased $75,000 mainly
due to  adjustments  in Home's  pricing  and  handling  of checks  returned  for
insufficient  funds and the inclusion of BNI. Security  transaction  commissions
increased  $64,000 due to volume  increases in brokerage  activities  at SFB and
Richmond and the introduction of these services at Home in the second quarter of
1999.  Gains on mortgage loan sales  increased  $42,000  mainly due to increased
volume in the first quarter of 1999. Offsetting these improvements were declines
in rent income,  ATM fees,  and other income the


                                       17

<PAGE>

first six months of 1999.  Rent  income  decreased  $16,000  due to the  Company
assuming space previously  leased to outside tenants.  ATM fees declined $12,000
in the  first  six  months  of 1999 due to  slightly  lower  volume  in  foreign
transactions at the Company's  terminals.  Other income decreased $11,000 mainly
due to fewer gains recognized from other real estate sales in 1999.

Other Expenses

       Total other expenses  increased  $155,000 in the first six months of 1999
compared  to  the  first  six  months  of  1998,   which   included  a  $598,000
merger-related  charge  recognized  in first  quarter  1999  resulting  from the
dissolution  of  Home's  ESOP,  as well as  $357,000  in  expenses  from LCC and
$159,000  in  expenses  from  BNI  which  were not  part of the  Company's  1998
operations  Exclusive of this  merger-related  charge, LCC, and BNI, total other
expenses  decreased  $958,000 or 7.1% due mainly to lower  costs for  personnel,
professional fees, advertising,  and credit card processing expenses.  Personnel
costs decreased  $447,000 in total and $719,000  exclusive of LCC and BNI mainly
due to  efficiencies  realized  from the  merger  with Home and  reduced  health
insurance  costs.  Legal and professional  fees declined  $193,000 as stated and
$205,000  exclusive of LCC and BNI due to  efficiencies  realized  from the Home
merger and reduced legal costs on  collection  activities.  Advertising  expense
decreased $35,000, all of which was due to adjustment to Home's marketing budget
post-merger.  Other  expenses  decreased  $41,000  due to the  Company no longer
incurring credit card processing fees in the first six months of 1999 due to the
sale of the credit card  portfolio  in third  quarter  1998,  as well as reduced
office  supply  costs in the first  half of 1999.  Occupancy  expense  increased
$67,000 as stated in the first six  months of 1999,  which  included  $73,000 in
expenses from LCC and BNI.  Exclusive of these  acquisitions,  occupancy expense
decreased  $6,000 in the first half of 1999 mainly due to  efficiencies at Home.
Offsetting  the  aforementioned   improvements  in  total  other  expenses  were
increased  expenses  for  data  processing   ($77,000),   goodwill  amortization
($72,000),  and  merchant  services  ($35,000).  Data  processing  and  merchant
services  expense both  increased  due to rate  adjustments  from the  Company's
service providers.  Data processing  expense was additionally  impacted by costs
incurred by Richmond to convert to the Company's data service provider in second
quarter 1999. The increase in goodwill  amortization  was related to the Company
including  LCC's   operating   results  in  its   consolidated   1999  operating
performance.

Income Taxes

       Income taxes for the six months ended June 30, 1999 increased $702,000 on
a $1,304,000  increase in income before income taxes.  As previously  described,
the Company incurred  $598,000 in a merger-related  charge in first quarter 1999
which were not  tax-deductible.  Excluding  the  merger-related  charge,  income
before income taxes increased $1,899,000,  resulting in an effective tax rate of
35.9% for six months  ended June 30,  1999  compared to 35.5% for the six months
ended  June  30,  1998.  The  slightly  higher  effective  tax  rate in 1999 was
primarily  related  to a  lower  percentage  of the  Company's  interest  income
generated from tax-exempt sources in 1999.


Liquidity

       Liquidity   management  involves  the  ability  to  meet  the  cash  flow
requirement of customers who may be either depositors  wanting to withdraw funds
or borrowers  needing  assurance that sufficient funds will be available to meet
their  credit  needs.   Liquid  assets  (including  cash  deposits  with  banks,
short-term investments,  interest-earning  deposits, and federal funds sold) are
maintained to meet customers needs. The Company had liquid assets of $61,871,000
and $82,230,000 at June 30, 1999 and December 31, 1998, respectively.


Year 2000 Readiness Disclosure

       At midnight on December 31, 1999,  unless the proper  modifications  have
been made,  the program  logic in many  computer  systems  will start to produce
erroneous results because,  among other things the systems will incorrectly read
the date  A01/01/00"  as being  January 1 of the year 1900 or another  incorrect
date.  In addition,  certain  systems may fail to detect that the year 2000 is a
leap year.  Problems can also arise earlier than January 1, 2000 as dates in the
next millennium are entered into non-Year 2000 compliant programs (collectively,
such  issues  are  referred  to herein as the "Year  2000  Problem").  Like most
financial service  providers,  the Company may be significantly  affected by the
Year 2000 Problem due to the nature of financial information.


                                       18
<PAGE>



       Compliance  Program.  In order to address  the Year 2000  Problem  and to
minimize its potential adverse impact, in 1997 the Company initiated a corporate
wide  project to address  the  impact of the Year 2000  Problem on its  computer
application  systems,  information  technology ("IT") related equipment,  system
software, building controls, and non-IT embedded systems found in such equipment
as security systems,  currency counters,  and elevators.  The evaluation of Year
2000 issues  included an  assessment  of the  potential  impact of the Year 2000
Problem on the Company, including monitoring significant customers, key vendors,
service  suppliers  and other  parties  material  to the  Company's  operations'
testing changes provided by these vendors; and developing  contingency plans for
any critical systems.  In the course of this evaluation,  the Company has sought
written  assurances  from  such  third  parties  as to their  state of Year 2000
readiness.  The  Company's  Year 2000  Compliance  Program is divided  into five
phases: (1) awareness; (2) assessment;  (3) renovation;  (4) validation; and (5)
implementation.

       The  Company's  State  of  Readiness.  Work on the Year  2000  Compliance
Program has been  prioritized in accordance with risk. The highest  priority has
been assigned to activities  that would disrupt the accuracy and delivery of the
Company's  banking  services  to its  customers;  next is an  assessment  of the
potential credit risk to the Company  resulting from its credit customers' state
of Year 2000  readiness,  or lack  thereof,  and the  potential  impact of those
efforts on the customers' ability to meet contractual payment  obligations;  the
lowest priority has been assigned to activities  that would cause  inconvenience
or  productivity  loss in normal  business  operations such as issues related to
internal office machinery, heating and air conditioning systems, and elevators.

       The Company has completed all phases of the plan and is currently working
internally and with external vendors on validating its contingency plan. Because
the Company out sources its data processing, a significant component of the Year
2000  Compliance  Program is working with  external  vendors to test and certify
that their  systems  are Year 2000  compliant.  During the weekend of October 3,
1998, the Company's primary data service provider converted State Financial Bank
and State Financial Bank - Waterford to its Year 2000-ready platform. As part of
the conversion, the Company performed a variety of tests to determine the proper
functionality of the new platform.  No problems were encountered.  The Company's
data services provider  continues to test its system for Year 2000 readiness and
has not encountered any problems as a result of their  continued  testing.  SFBR
and Home will converted to the Company's data services provider in May, 1999 and
July,  1999,  respectively.  BNI will  convert to the  Company's  data  services
provider in October, 1999.

       The Company's  other  external  vendors have surveyed  their  programs to
inventory  the  necessary  changes  and the  Company  continued  correcting  the
applicable  computer  programs and  replacing  equipment  so that the  Company's
information  systems to be Year 2000  compliant as of June 30, 1999. The Company
completed a substantial  portion of its Year 2000 testing by June 30, 1999.  The
Company has devoted substantial time to testing its systems prior to the arrival
of the new millennium.  As part of SFBR's and Home's conversion to the Company's
data services provider, the Company installed a new wide area network connecting
all of its  offices.  The  Company  tested the wide area  network  for Year 2000
readiness  and  compatibility  with  its  other  systems  immediately  following
installation.

       The Company also conducted a survey of its significant  credit  customers
to  determine  their state of Year 2000  readiness.  Surveys  were mailed to all
customers whose outstanding loan balance or loan commitment  exceeded  $200,000.
In addition, as part of its ongoing credit underwriting  practices,  all new and
renewed  loans must have a Year 2000 risk  assessment  completed and reported as
part of the loan  approval  process.  Based upon the  information  received from
these surveys, the Company does not expect to experience any material collection
problems resulting from its customers Year 2000 readiness, or lack thereof.

       Cost to  Address  Year 2000  Compliance  Issues.  Managing  the Year 2000
Compliance  Program  resulted in  additional  direct and  indirect  costs to the
Company.  To date,  the Company  has  incurred  approximately  $500,000 in costs
related to addressing the Year 2000 Problem, including approximately $471,000 in
hardware  purchases that the Company has  capitalized.  The Company  expects any
additional  costs  incurred  regarding  its Year 2000  Compliance  Program to be
immaterial.  If incurred, any remaining costs related to resolving the Year 2000
Problem are  expected to take place during the  remainder  of 1999.  The Company
expects to fund these expenditures through internal sources.

       The estimated  costs of, and timetable for,  becoming Year 2000 compliant
constitute  "forward  looking  statements" as defined in the Private  Securities
Litigation  Reform Act of 1995.  Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued  availability of certain  resources,  the accuracy of  representations
made by third parties  concerning  their  compliance with

<PAGE>


Year 2000 issues, and other factors. The estimated costs of Year 2000 compliance
also do not give effect to any future corporate acquisitions made by the Company
or its subsidiaries.

       Risk of  Non-Compliance  and Contingency  Plans.  The major  applications
which pose the greatest  risk to the Company if the  implementation  of the Year
2000  Compliance  Program is not  successful  are the  Company's  data  services
systems  supported  by third  party  vendors,  loan  customers  ability  to meet
contractual  payment  obligations  in the  event  the Year  2000  Problem  has a
significant negative impact on their business,  internal computer networks, and,
items processing  equipment which renders  customers bank statements and banking
transactions.  The potential  problems  which could result from the inability of
these  applications  to  correctly  process  the Year  2000  are the  inaccurate
calculation of interest income and expense,  service  delivery  interruptions to
the Company's banking customers, credit losses resulting from the Company's loan
customers  inability  to  make  contractual  credit   obligations,   interrupted
financial data gathering,  and poor customer relations resulting from inaccurate
or delayed transaction processing, respectively.

       Although the Company  intends to complete all Year 2000  remediation  and
testing activities by June 30, 1999, and although the Company has initiated Year
2000 communications with significant customers,  key vendors, service providers,
and  other  parties  material  to the  Company's  operations  and is  diligently
monitoring  the  progress of such third  parties in their Year 2000  compliance,
such third  parties  nonetheless  represent a risk that cannot be assessed  with
precision or controlled with certainty.  For that reason, the Company intends to
develop  contingency  plans to address  alternatives in the event that Year 2000
failures of automatic systems and equipment occur.  Preliminary discussions have
been  held  regarding  the  contingency  plan  and a final  contingency  plan is
scheduled to be completed by the end of the second quarter of 1999.

Forward Looking Statements

       When used in this report,  the words  "believes,"  "expects," and similar
expressions are intended to identify forward-looking  statements.  The Company's
actual results may differ materially from those described in the forward-looking
statements.  Factors which could cause such a variance to occur include, but are
not limited  to,  changes in interest  rates,  levels of consumer  bankruptcies,
issues associated with achieving Year 2000 compliance, customer loan and deposit
preferences,  issues related to integrating acquired operations,  and changes in
other general economic conditions.

Capital Resources

       There are certain regulatory constraints which affect the Company's level
of capital.  The following table sets forth these requirements and the Company's
capital levels and ratios at June 30, 1999, including the Tier 1 leverage ratio,
the risk-based  capital ratios based upon Tier 1 capital,  and total  risk-based
capital:

<TABLE>
<CAPTION>

                                                             Regulatory                 Regulatory
                                                              Minimum                Well-capitalized
                                      Actual                 Requirement               Requirement
                                 ---------------          ----------------           -----------------
                                                       (dollars in thousands)

                                Amount       Percent        Amount     Percent         Amount       Percent

<S>  <C>                       <C>             <C>          <C>           <C>          <C>             <C>
Tier 1 leverage                106,849         12.9%        33,137        4.0%         41,421          5.0%

Tier 1 risk-based capital      106,849         16.6%        25,709        4.0%         38,563          6.0%

Risk-based capital             113,836         17.7%        51,418        8.0%         64,272         10.0%
</TABLE>

       The Company is pursuing a policy of continued asset growth which requires
the maintenance of appropriate ratios of capital to assets. The existing capital
levels allow for additional asset growth without further capital  injection.  It
is the Company's  desire to maintain its capital position at or in excess of the
"well-capitalized"  definition.  The Company seeks to obtain additional  capital
growth through earnings retention and a conservative dividend policy.



                                       20
<PAGE>



Part II.   Other Information

Item 1.   Legal Proceedings

          As of June 30, 1999, the Company is involved in various  pending legal
proceedings consisting of ordinary routine litigation incidental to the business
of the Company. None of these proceedings is considered material, either in part
or in the aggregate,  and are therefore not expected to have a material  adverse
impact on the Company's financial condition,  results of operations, cash flows,
and capital ratios.

Item 2.   Changes in Securities

          None

Item 3.   Defaults upon Senior Securities

          None

Item 4.   Submission of Matters to Vote of Security Holders

          Annual Meeting of Shareholders. On May 13, 1998, at the Annual Meeting
of the shareholders of the Company, the Company's  shareholders reelected Jerome
J. Holz,  David M. Stamm,  and Thomas S. Rakow as directors for three year terms
expiring on the date of the annual shareholders' meeting to be held in 2002.

Shareholder Vote with Respect to Matters Acted Upon at the Annual Meeting

          Election of  Directors.  Under  Wisconsin  law,  the number of persons
corresponding  to the number of  director  positions  to be filled at the Annual
Meeting who received the highest  number of votes would be elected as directors.
Jerome J. Holz, David M. Stamm, and Thomas S. Rakow were standing for reelection
at the Annual  Meeting.  The vote with respect to the  reelection of each was as
follows:

JEROME J. HOLZ
--------------

          10,081,447 total votes were eligible to be cast.
           8,622,347 votes were represented in person or by proxy at the Annual
                     Meeting.
           8,258,869 votes were cast "FOR" the reelection of Mr. Holz
             363,478 votes abstained or were broker non-votes.


DAVID M. STAMM
--------------

          10,081,447 total votes were eligible to be cast.
           8,622,347 votes were represented in person or by proxy at the Annual
                     Meeting.
           8,278,607 votes were cast "FOR" the reelection of Mr. Stamm
             343,740 votes abstained or were broker non-votes.


THOMAS S. RAKOW
---------------

          10,081,447 total votes were eligible to be cast.
           8,622,347 votes were represented in person or by proxy at the Annual
                     Meeting.
           8,273,582 votes were cast "FOR" the reelection of Mr. Rakow
             348,765 votes abstained or were broker non-votes.




                                       21
<PAGE>



Item 5.   Other Information

          The deadline for submission of shareholder  proposals pursuant to Rule
14a-8 under the  Securities  Exchange Act of 1934, as amended,  for inclusion in
the Company's  proxy  statement for its 2000 Annual Meeting of  Shareholders  is
November 27, 1999. Additionally, if the Company receives notice of a shareholder
proposal after January 27, 2000,  the persons named in proxies  solicited by the
Board of  Directors of the Company for its 2000 Annual  Meeting of  Shareholders
may exercise discretionary voting power with respect to such proposal.

Item 6.   Exhibits and Reports on Form 8-K

          The Company  filed a report on Form 8-K on June 23, 1999 in regards to
its  completion  of the  acquisition  of  First  Waukegan  Corporation  and  its
subsidiaries.













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<PAGE>










                                   SIGNATURES

Pursuant  to the  requirement  of the  Securities  Exchange  Act  of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                       STATE FINANCIAL SERVICES CORPORATION
                                       (Registrant)



Date: August 10, 1999

                                       By  /s/ Michael J. Falbo
                                          Michael J. Falbo
                                          President and Chief Executive Officer



Date: August 10, 1999
                                       By  /s/ Michael A. Reindl
                                          Michael A. Reindl
                                          Senior Vice President, Controller,
                                          and Chief Financial Officer



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