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                                            March 31, 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 May 12, 1999, there were 10,086,214  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
             March 31, 1999 and December 31, 1998                              2

             Consolidated Statements of Income for the
             Three Months ended March 31, 1999 and 1998                        3

             Consolidated Statements of Income for the
             Three Months ended March 31, 1999 and 1998                        4

             Consolidated Statements of Cash Flows for the
             Three Months ended March 31, 1999 and 1998                        5

             Notes to Consolidated Financial Statements                        6

Item 2.      Management's Discussion and Analysis of
             Financial Condition and Results of Operations                     8



                           PART II - OTHER INFORMATION

Items 1-6                                                                     16

Signatures                                                                    18


<PAGE>


Part I.      Financial Information
Item 1.      Financial Statements

STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>

                                                                       March 31,           December 31,
                                                                          1999                1998
                                                                  -----------------    -----------------
 
ASSETS
<S>                                                                   <C>                  <C>         
  Cash and due from banks                                           $   26,509,621        $  31,028,203
  Federal funds sold                                                    10,411,118            8,508,387
  Other short-term investments                                          15,720,000           12,900,000
    Interest-earning deposits                                           39,849,239           29,793,241
                                                                  -----------------    -----------------
  Cash and cash equivalents                                             92,489,978           82,229,831
                                                                  -----------------    -----------------

Investment securities
  Held-to-maturity (fair value $8,413,000  - March 31, 1999
      and $10,479,402 - December 31, 1998)                               8,271,465           10,290,241
  Available for sale (at fair value)                                    95,909,229           94,704,827

  Loans (net of allowance for loan losses of $4,612,029 -March 31,
      1999 and $4,484,504 -December 31, 1998)                          615,134,097          607,948,900
     
  Premises and equipment                                                13,719,426           13,333,369
  Accrued interest receivable                                            4,516,456            4,485,332
  Other assets                                                          15,246,682           15,376,023
                                                                  -----------------    -----------------
                                                    TOTAL ASSETS     $ 845,287,333        $ 828,368,523
                                                                  =================    =================

LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits:
    Demand                                                              75,607,265           81,540,940
    Savings                                                            193,782,374          199,266,311
    Money market                                                       126,842,687          120,297,093
    Other time                                                         246,806,801          251,800,542
                                                                  -----------------    -----------------
                                                  TOTAL DEPOSITS       643,039,127          652,904,886


  Notes payable                                                                -0-            6,750,000
  Securities sold under agreements to repurchase                        10,923,160            4,116,677
   Federal Home Loan Bank advances                                      50,000,000           25,000,000
  Accrued expenses and other liabilities                                 4,013,712            3,270,762
  Accrued interest payable                                               1,881,084            1,688,920
                                                                  -----------------    -----------------
                                               TOTAL LIABILITIES       709,857,083          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--10,081,447 shares in 1999             
  and 10,076,017 in 1998                                                 1,008,145            1,007,601  
  Capital surplus                                                       94,800,284           94,153,564  
  Accumulated other comprehensive income                                   732,219            1,080,549  
  Retained earnings                                                     44,119,038           43,748,273  
  Less:  Guaranteed ESOP obligation                                     (5,229,436)          (5,352,709)  
                                                                  -----------------    -----------------
                                      TOTAL STOCKHOLDERS' EQUITY       135,430,250          134,637,278
                                                                  -----------------    -----------------
                      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $ 845,287,333        $ 828,368,523
                                                                  =================    =================

See notes to unaudited consolidated financial statements.
</TABLE>

                                       2
<PAGE>


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

                                                                      Three months ended March 31,

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

INTEREST INCOME:
<S>                                                                    <C>                  <C>        
  Loans, including fees                                                $12,178,444          $11,964,555
  Investment securities
    Taxable                                                              1,567,087            1,731,508
    Tax-exempt                                                             361,625              310,247
  Federal funds sold                                                       152,716              236,240
                                                                  -----------------    -----------------
                                           TOTAL INTEREST INCOME        14,259,872           14,242,550

INTEREST EXPENSE:
  Deposits                                                               5,654,750            6,193,649
  Notes payable and other borrows                                          646,780              163,688
                                                                  -----------------    -----------------
                                          TOTAL INTEREST EXPENSE         6,301,530            6,357,337
                                                                  -----------------    -----------------
                                             NET INTEREST INCOME         7,958,342            7,885,213


Provision for loan losses                                                  172,500              172,500
                                                                  -----------------    -----------------
                                      NET INTEREST INCOME AFTER
                                       PROVISION FOR LOAN LOSSES         7,785,842            7,712,713

OTHER INCOME:
  Service charges on deposit accounts                                      476,740              437,681
  Merchant service fees                                                    315,914              309,942
  Building rent                                                             69,511               69,686
  ATM fees                                                                 166,238              174,655
  Security transaction commissions                                         117,707               89,788
  Asset management fees                                                    150,128                  -0-
  Gains on sale of loans                                                   205,872              156,981
  Investment security gains                                                208,705              202,058
  Other                                                                    133,393              179,187
                                                                  -----------------    -----------------
                                              TOTAL OTHER INCOME         1,844,208            1,619,978


OTHER EXPENSES:
  Salaries and employee benefits                                         2,954,593            3,356,220
  Net occupancy expense                                                    325,921              320,579
  Equipment rentals, depreciation and maintenance                          729,089              711,491
  Data processing                                                          539,129              482,583
  Legal and professional                                                   239,518              396,554
  Merchant service charges                                                 228,422              219,943
  ATM charges                                                              145,017              144,403
  Advertising                                                              177,799              229,281
  Goodwill amortization                                                    177,689              140,460
  Merger-related charges                                                   598,292                  -0-
  Other                                                                    802,738              849,302
                                                                  -----------------    -----------------
                                            TOTAL OTHER EXPENSES         6,918,207            6,850,816

                                      INCOME BEFORE INCOME TAXES         2,711,843            2,481,875
Income taxes                                                             1,184,788              881,636
                                                                  -----------------    -----------------
                                                      NET INCOME       $ 1,527,055          $ 1,600,239
                                                                  =================    =================
 Basic earnings per common share                                             $ 016               $ 0.17
 Diluted earnings per common share                                            0.16                 0.16
 Dividends per common share                                                   0.12                 0.12
 Basic weighted average common shares outstanding                        9,634,927            9,606,420
 Diluted weighted average common shares outstanding                      9,654,394            9,775,819
See notes to unaudited consolidated financial statements.

</TABLE>

                                       3
<PAGE>


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

                                                                      Three months ended March 31,
                                                                        1999                 1998
                                                                  -----------------    -----------------

OPERATING ACTIVITIES
<S>                                                                   <C>                   <C>        
  Net income                                                          $  1,527,055          $ 1,600,239
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Provision for loan losses                                            172,500              172,500
      Provision for depreciation                                           357,325              383,030
      Amortization of investment security
        premiums and accretion of discounts-net                             28,304               49,564
      Amortization of goodwill                                             177,689              140,460
      Market adjustment for committed ESOP shares                          598,291              233,214
      Cost of Recognition and Retention Plan                                   -0-              224,912
      Increase in interest receivable                                      (31,124)            (113,719)
      Increase in interest payable                                         192,164              118,309
      Realized investment security gains-net                              (208,705)            (202,058)
      Other                                                                889,778              102,797
                                                                  -----------------    -----------------
                       NET CASH PROVIDED BY OPERATING ACTIVITIES         3,703,277            2,709,248

INVESTING ACTIVITIES
  Purchases of investment securities                                           -0-                  -0-
  Maturities of investment securities                                    2,005,892              706,425
  Purchases of securities available for sale                           (10,588,946)         (13,086,602)
  Maturities and sales  of securities available for sale                 9,034,323           10,620,132
  Net decrease (increase) in loans                                      (7,357,697)             645,332
  Purchases of premises and equipment                                     (743,382)             (85,267)
                                                                  -----------------    -----------------
                           NET CASH USED BY INVESTING ACTIVITIES        (7,649,810)          (1,199,980)

FINANCING ACTIVITIES
  Increase (decrease) in deposits                                       (9,865,759)          13,920,265
  Decrease in notes payable                                             (6,750,000)          (4,400,000)
  Decrease in guaranteed ESOP obligation                                   123,273              268,349
  Net proceeds from securities sold under agreement to                
  repurchase                                                             6,806,483            6,863,840   
  Increase (decrease) in Federal Home Loan Bank Advances                25,000,000           (5,000,000)
  Cash dividends                                                        (1,156,290)          (1,145,795)  
  Proceeds from exercise of stock options                                   48,973                3,135   
                                                                  -----------------    -----------------    
                       NET CASH PROVIDED BY FINANCING ACTIVITIES        14,206,680           10,509,794
                                                                  -----------------    -----------------
INCREASE IN CASH AND CASH EQUIVALENTS                                   10,260,147           12,019,062

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        82,229,831           80,584,884
                                                                  -----------------    -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $ 92,489,978          $92,603,946
                                                                  =================    =================

Supplemental information:
  Interest paid                                                       $  6,109,366          $ 6,239,028
  Income taxes paid                                                        786,500              272,000


See notes to unaudited consolidated financial statements.
</TABLE>

                                       4
<PAGE>



STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1999


NOTE A--BASIS OF PRESENTATION

       The accompanying  unaudited consolidated financial statements include the
accounts  of  State  Financial  Services  Corporation  (the  "Company")  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"), and Home Federal Savings and
Loan  Association  of Elgin  ("Home").  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.  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.  Operating  results for the three month period  ending March 31,
1999 are not necessarily  indicative of the results that may be expected for the
year ended December 31, 1999. 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--ACQUISITIONS

       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  September  8, 1998  through  March  31,  1999 are  included  in the
Company's consolidated statements of income for the three and three months ended
March  31,  1999.  LCC's  financial  condition  is  included  in  the  Company's
consolidated  balance  sheets dated March 31, 1999. No operating  results of LCC
are included in the  Company's  consolidated  statements of income for the three
and three months ended March 31, 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 C - COMPREHENSIVE INCOME

       On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting  Comprehensive Income." This statement 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.

                                       5
<PAGE>




                                    For the three months ended
                                    March 31,         March 31,
                                       1999             1998
                                 ----------------- ----------------

Net income                             $1,527,055       $1,600,239
Other comprehensive income
Change in unrealized securities
  gains (losses), net of tax             (139,625)          93,513
Reclassification adjustment for
  realized gains included in          
  net income                             (208,705)        (202,058)
                                 ----------------- ----------------
Total comprehensive income             $1,178,725       $1,491,694
                                 ----------------- ----------------

NOTE D--SEGMENT INFORMATION

       The Company evaluates segment  performance for each subsidiary  financial
institution,  which is  differentiated  primarily by  geographic  location.  The
Company has four reportable  segments:  State Financial Bank (Wisconsin),  State
Financial Bank - Waterford,  State Financial Bank  (Illinois),  and Home Federal
Savings and Loan Association of Elgin. 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 three months ended March 31, 1999 and
1998.

<TABLE>
<CAPTION>

                                           For the three months ended March 31, 1999

                                                                         Home
                                                                        Federal
                           State          State          State        Savings and
                         Financial       Financial      Financial        Loan          
                            Bank           Bank -          Bank       Association        All                    
                        (Wisconsin)      Waterford      (Illinois)     of Elgin         Other       Consolidated  
                        ----------------------------------------------------------------------------------------
<S>                     <C>             <C>            <C>            <C>            <C>           <C>         
Interest income         $  5,101,623    $   953,774    $ 1,352,260    $  6,825,033   $   27,182    $ 14,259,872
Interest expense           1,990,915        436,941        670,910       3,331,679     (128,915)      6,301,530
----------------------------------------------------------------------------------------------------------------
Net interest income        3,110,708        516,833        681,350       3,493,354      156,097       7,958,342
Provision for loan                                                                                
losses                        75,000          7,500         60,000          30,000            0         172,500
----------------------------------------------------------------------------------------------------------------
Net interest income                                                                               
 after                     3,035,708        509,333        621,350       3,463,354      156,097       7,785,842
 provision for loan                                                                               
 losses                      892,521         87,705        149,632         280,870      433,480       1,844,208 
Other income                       0              0              0         598,292            0         598,292 
Merger-related charges                                                                                          
Other noninterest                                                                                 
 expense                   2,391,283        451,763        854,840       2,233,464      388,565       6,319,915
                        ----------------------------------------------------------------------------------------
Income (loss) before                                                                              
 income taxes              1,536,946        145,275        (83,858)        912,468      201,012       2,711,843
Income taxes                 477,318         41,045        (11,678)        587,313       90,790       1,184,788
                        ----------------------------------------------------------------------------------------
Net income              $  1,059,628        104,230   ($    72,180)   $    325,155   $  110,222    $  1,527,055
                        ========================================================================================
Total assets            $291,148,085    $54,868,114    $79,381,485    $411,957,014   $7,932,635    $845,287,333
                        ========================================================================================
</TABLE>

                                       6
<PAGE>


<TABLE>
<CAPTION>

                                          For the three months ended March 31, 1998


                                                                         Home
                                                                         Federal
                           State          State         State         Savings and
                         Financial      Financial     Financial           Loan        
                           Bank          Bank -          Bank         Association        All                    
                        (Wisconsin)     Waterford     (Illinois)        of Elgin        Other     Consolidated 
----------------------------------------------------------------------------------------------------------------
                                                                                                  
<S>                    <C>            <C>            <C>             <C>            <C>           <C>         
Interest income        $  5,237,468   $   914,863    $ 1,655,280     $ 6,431,339    $    3,600    $ 14,242,550
Interest expense          2,218,496       455,034        932,589       2,743,360         7,858       6,357,337
----------------------------------------------------------------------------------------------------------------
                                                                                                  
Net interest income       3,018,972       459,829        722,691       3,687,979        (4,258)      7,885,213
Provision for loan                                                                               
losses                       75,000         7,500         60,000          30,000             0         172,500
----------------------------------------------------------------------------------------------------------------
Net interest income                                                                               
 after provision for                                                                             
 loan losses              2,943,972       452,329        662,691       3,657,979        (4,258)      7,712,713
Other income                851,088        78,459        250,459         238,186       201,786       1,619,978   
Merger-related charges            0             0              0               0             0               0   
Other noninterest                                                                                               
 expense                  2,300,370       458,769        865,041       3,063,865       162,771       6,850,816   
                       ----------------------------------------------------------------------------------------
Income (loss) before                                                                             
 income taxes             1,494,690        72,019         48,109         832,300        34,757       2,481,875 
Income taxes                472,211        18,608         49,228         322,560        19,029         881,636 
                       ----------------------------------------------------------------------------------------
Net income             $  1,022,479   $    53,411  ($      1,119)   $    509,740    $   15,728    $  1,600,239 
                       ========================================================================================
Total assets           $273,701,278   $49,586,432    $91,910,313    $373,950,514   ($2,496,483)   $786,652,054 
                       ========================================================================================  

</TABLE>



NOTE E--PENDING ACQUISITION

       On March 12, 1999, the Company executed a Definitive Agreement to acquire
all of the  outstanding  common  stock of First  Waukegan  Corporation  ("FWC"),
Waukegan,  Illinois in exchange for $28 million in cash.  FWC is the parent bank
holding  company of Bank of  Northern  Illinois,  N.A.,  a  national  commercial
banking   institution   which   operates  five  offices  in  Waukegan,   Gurnee,
Libertyville,  and Glenview (2), Illinois. The merger will be accounted for as a
purchase.  The acquisition,  which requires  approval by FWC's  shareholders and
regulatory  authorities  is expected to close no later than the end of the third
quarter of 1999. At March 31, 1999, FWC had consolidated  total assets of $207.6
million.

                                       7
<PAGE>


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


Changes in Financial Condition

       At  March  31,  1999,   total  assets  were   $845,287,000   compared  to
$828,369,000 at December 31, 1998. At March 31, 1999,  total deposits  decreased
$9,866,000  compared  to December  31,  1998 mainly due to cyclical  declines in
demand and  savings  balances  and lower time  deposit  balances  as  depositors
migrated to money market accounts in the current  relatively lower interest rate
environment.  Other  significant  uses of funds during the first three months of
1999 consisted of $10,260,000  in increased  cash and cash  equivalents  (mainly
short-term  investments and interest-earning  deposits),  $7,358,000 in net loan
increases,  the  retirement  of  $6,750,000  in notes  payable,  the  payment of
$1,156,000  in cash  dividends,  and the  purchase of $743,000 in fixed  assets,
mainly  in  computer   enhancements  as  the  Company  upgraded  its  system  in
preparation for Richmond's and Elgin's  conversion to the Company's data service
provider in May and July, respectively.  Funding sources came from a $25,000,000
increase in Federal Home Loan Bank Advances, a $6,806,000 increase in securities
sold  under  agreements  to  repurchase,  $3,703,000  in net  cash  provided  by
operating  activities,  $451,000 in net  investment  securities  maturities  and
sales, $123,000 in ESOP loan repayments,  and $49,000 in proceeds from exercised
stock options.

       State  reported  asset  growth at each of its banking  operations  except
State  Financial  Bank  (Illinois).  Home  reported  the largest  asset  growth,
increasing  $38.0 million  between March 31, 1999 and March 31, 1998, the result
of deposit  growth  and  increased  Federal  Home Loan Bank  borrowings  used to
support  mortgage loan growth.  State  Financial Bank and State Financial Bank -
Waterford  reported  total asset  increases of $17.4  million and $5.3  million,
respectively.  Additionally, the LCC acquisition added $2.6 million in assets to
State's consolidated footings. State Financial Bank (Illinois) experienced $12.5
million in asset  contraction as management  strategically  reduced the level of
municipal deposits outstanding at that institution.  State reported net loans of
$615.1  million at March 31,  1999,  an increase  of $52.8  million or 9.4% over
March 31, 1998 mainly due to  increased  mortgage  originations  at Home.  Total
deposits at March 31,  1999 grew $11.1  million or 1.8% to $643.0  million  from
$631.9 million at March 31, 1998. Total stockholders' equity increased to $135.4
million at March 31, 1999 from $134.8  million at March  31,1998 due to earnings
retention  net of dividends,  changes in the value of  securities  available for
sale over the preceding  twelve months,  the additional stock issued to complete
the acquisition of LCC in September,  1998 and Home's purchase of treasury stock
in the third and fourth quarters of 1998.

Asset Quality

       At March 31, 1999,  non-performing assets were $3,910,000,  a decrease of
$13,000 from December 31, 1998 due to an increase of $440,000 in accruing  loans
past due 90 days or more,  offset by a decrease of $341,000 in nonaccrual  loans
and a decrease of $112,000 in other real estate. Total non-performing  assets as
a percentage of total assets  decreased to 0.46% at March 31, 1999 from 0.47% at
December 31, 1998 due to the decrease in the amount of total  non-performing and
restructured loans and a an increase in the level of outstanding total assets at
March 31, 1999 as compared to December 31, 1998 As a  percentage  of total loans
outstanding,  the level of non-performing  loans increased to 0.56% at March 31,
1999 from 0.55% at December 31, 1998 due to the increase in accruing  loans past
due 90 days or more between March 31, 1999 and year end 1998.

       At March 31, 1999,  available  information  would suggest that additional
loans  totaling  approximately  $500,000 would likely be included as nonaccrual,
past due or restructured during the second quarter of 1998.


                                       8
<PAGE>


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

<TABLE>
<CAPTION>
                                             Mar. 31     Dec 31     Sep. 30     Jun. 30     Mar. 31
                                                1999       1998        1998        1998        1998
                                          ----------------------------------------------------------
<S>                                       <C>         <C>             <C>     <C>         <C>      
Nonaccrual loans......................... $    2,904  $   3,245       2,681   $   3,151   $   3,287
Accruing loans past due 90 days or more..        546        106         436         118          68
Restructured loans.......................          0          0           0           0           0
                                          ----------------------------------------------------------
Total non-performing and restructured          
loans                                          3,450      3,351       3,117       3,269       3,355
                                          ----------------------------------------------------------
Other real estate owned..................        460        572         347         234         728
                                          ----------------------------------------------------------
Total non-performing assets.............. $    3,910  $   3,923       3,464       3,503   $   4,083
                                          ============================================================
Ratios:
  Non-performing loans to total loans....       0.65%      0.55%       0.52%       0.56%       0.59%
  Allowance to non-performing loans......     133.68     133.84      143.95      137.42      133.96
  Non-performing assets to total assets..       0.46       0.47        0.43        0.45      0.0.52
                                          ============================================================
</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 March 31, 1999, the Allowance was $4,612,000,  an increase of
$127,000  from the balance at December 31, 1998.  This  increase was due to loan
loss  provisions  exceeding  net  charge-offs  through the first three months of
1999.

       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 of future losses.  As a percentage of loans,  the Allowance was 0.74%
at March 31,  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 March 31, 1999.








            [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

                                       9
<PAGE>


       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>

                                                     Three months
                                                         ended             Year ended
                                                     March 31, 1999      Dec. 31, 1998
                                                         
                                                  -----------------------------------------
<S>                                                <C>                  <C>            
     Balance at beginning of period                $         4,485      $         4,370
     Charge-offs:
        Commercial                                               5                  146
        Real estate                                              0                   39
        Installment                                             77                  465
        Other                                                    6                  149
                                                  -----------------------------------------
        Total charge-offs                                       88                  799
                                                  -----------------------------------------
     Recoveries:
        Commercial                                              33                   79
        Real estate                                              1                   59
        Installment                                              8                   60
        Other                                                    1                   26
                                                  -----------------------------------------
        Total recoveries                                        43                  224
                                                  -----------------------------------------
     Net charge-offs                                            45                  575
     Additions charged to operations                           172                  690
                                                  -----------------------------------------
     Balance at end of period                      $         4,612      $         4,485
                                                  =========================================
     Ratios:
        Net charge-offs to
          average loans outstanding1                          0.03%                0.10%
       Net charge-offs to total allowance1                    3.90                12.82
       Allowance to period end
          loans outstanding                                   0.74                 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 quarter of 1999. Annualized installment
loan  charge-offs  declined  in  first  quarter  1999  as  SFBR  incurred  fewer
write-offs on its indirect subprime auto loan portfolio. 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 March 31, 1999 and
                        1998

General

       For the quarter ended March 31, 1999, the Company  reported net income of
$1,527,000,  a decrease of $73,000 or 4.6% from the $1,600,000  reported for the
quarter  ended March 31, 1998.  Included in first  quarter 1999 were $598,000 in
additional  merger-related charges stemming from the Company's merger with Home.
These  charges  resulted  solely  from the  dissolution  of Home's ESOP in first
quarter 1999.  Exclusive of these charges, net income for first quarter 1999 was
$2,125,000,  a 32.8%  increase over first  quarter 1998.  Increased net interest
income and non-interest income and reduced non-interest  expenses,  exclusive of
the merger-related charges, were the main reasons for this improvement.


                                       10
<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
March 31, 1999 and March 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>

                                                     1999                       1998
                                          --------------------------- ---------------------------
                                            Average          Yield/     Average          Yield/
                                            Balance Interest  Rate4     Balance Interest Rate4
                                          --------------------------- ---------------------------
ASSETS
Interest-earning assets:
<S>                                        <C>        <C>     <C>      <C>       <C>      <C>   
  Loans 1,2,3                              $617,932   12,211  8.01%    $565,071  $11,991  8.61 %
  Taxable investment securities              71,579    1,047  5.93       68,330    1,083  6.43
  Tax-exempt investment securities 3         32,755      548  6.79       26,889      470  7.09
  Other short-term investments               17,196      220  5.19        2,022       29  5.82
  Interest-earning deposits                  30,038      300  4.05       50,369      619  4.98
  Federal funds sold                         12,338      153  5.03       17,065      236  5.61
                                          --------------------------- ---------------------------
Total interest-earning assets               781,838   14,479  7.51      729,746   14,428  8.02
Non-interest-earning assets:
  Cash and due from banks                    31,614                      24,079
  Premises and equipment, net                13,460                      13,702
  Other assets                               19,633                      17,997
Less: Allowance for loan losses              (4,531)                     (4,416)

TOTAL                                      $842,014                    $781,108
                                          =========                   ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
  Now accounts                             $ 86,809      395  1.85%    $ 83,225      471 2.30%
  Money market accounts                     127,943    1,192  3.78      107,129    1,202 4.55
  Savings deposits                          106,927      652  2.47      105,416      748 2.88
  Time deposits                             248,557    3,416  5.57      264,720    3,773 5.78
  Notes payable                               2,325       50  8.72        1,333       23 7.00
  FHLB borrowings                            41,667      459  4.47        1,167       17 5.91
  Federal funds purchased                     2,651       33  5.05            0        0 0.00
  Securities sold under
    agreement to repurchase                   8,920      105  4.77        9,434      124 5.33
                                          --------------------------- ---------------------------
Total interest-bearing liabilities          625,799    6,302  4.08      572,424    6,358 4.50
Non-interest-bearing liabilities:
  Demand deposits                            76,266                      68,003
  Other                                       4,915                       6,129
                                          ---------                   ---------
Total liabilities                           706,980                     646,556
                                          ---------                   ---------
Stockholders' equity                        135,934                     134,552
                                          ---------                   ---------
TOTAL                                      $842,014                    $781,108
                                          =========                   =========
Net interest earning and interest rate                 
spread                                                 8,177  3.43%              $ 8,070 3.52%
                                                      ===============            ================
Net yield on interest-earning assets                          4.24%                      4.48%
-------------------------------------------                 =========                   =========
    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>

       For  the  quarter   ended   March  31,   1999,   the   Company   reported
taxable-equivalent net interest income of $8,177,000, an increase of $107,000 or
1.3% from the  $8,070,000  reported for the quarter  ended March 31,  1998.  The
Company's  taxable-equivalent  yield on  interest-earning  assets (net  interest
margin)  declined  to 4.24% in first  quarter  1998 from 4.48% in first  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.

                                       11
<PAGE>


       Taxable-equivalent  total  interest  income  increased  $51,000  for  the
quarter  ended  March 31,  1999  compared  to the first  quarter  of 1998.  This
improvement was mainly due to volume increases in  interest-earning  assets over
the preceding twelve months. The Company reported a $52,092,000 or 7.1% increase
in the  volume of average  interest-earning  assets in first  quarter  1999 over
first  quarter 1998.  Virtually  all of this increase came in increased  average
loan volume resulting mainly from continued mortgage loan growth.  Average loans
outstanding  increased  52,861,000  or 9.4% in first  quarter  1999  over  first
quarter 1998. 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 March 31, 1999, the Company's  taxable-equivalent
yield on interest-earning  assets fell to 7.51% from 8.02% for the quarter ended
March 31, 1998.  The Company's  first quarter 1999 loan yield  declined to 8.01%
from 8.61% in first 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 in
1999.  The  Company  also  experienced  yield  contraction  in its  taxable  and
tax-exempt investment securities due to the reinvestment of maturing investments
proceeds  into 1999's lower rate  environment.  For the quarter  ended March 31,
1999,  the  yield  on  taxable  investment  securities  declined  to  5.93%  and
tax-exempt investment yields declined to 6.79% from 6.43% and 7.09% respectively
for the quarter ended March 31, 1998.

       Reduced  funding  costs  helped to offset the  impacts  of reduced  asset
yields in first quarter 1999. The cost of interest-bearing  liabilities declined
to 4.08% for first quarter 1999 from 4.50% for first  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 first  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 1.85% in first  quarter 1999 from 2.30% in first  quarter
1998. Similarly, the repricing of savings deposits resulted in that deposit cost
falling to 2.47% in 1999 from 2.88% in 1998.  The cost of money market  accounts
fell to 3.78% in first  quarter 1999 from 4.55% in first quarter 1998 mainly due
to the general decline in short-term interest rates over the last twelve months.
Time deposit  costs also fell to 5.57% in first quarter 1999 from 5.78% in first
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  $16,163,000  decline  in  the  volume  of
outstanding  average time deposits and a  $20,814,000  increase in the volume of
average money market accounts in first quarter 1999 as compared to first 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 first 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 first quarter 1999 compared
to first quarter 1998,  which helped to improve the Company's first quarter 1999
cost of funds. Average time deposits comprised 39.7% of average interest-bearing
liabilities in first quarter 1999 compared to 46.2% in first quarter 1998.


Provision for Loan Losses

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


Other Income

       Total other income  increased  $224,000 in first  quarter 1999 over first
quarter  1998.  The  inclusion  of LCC's asset  management  fees  accounted  for
$150,000  of this  increase.  Exclusive  of LCC,  total other  income  increased
$74,000 due to increases in gains on mortgage origination sales, service charges
on deposit accounts,  security transaction  commissions,  merchant services, and
investment  securities  gains,  offset by reductions in ATM fees, gains realized
from other real estate sales, and other income.  For the quarter ended March 31,
1999,  gains on mortgage  origination  sales increased  $49,000 due to increased
volume  resulting  from  continued  strong  mortgage  demand at SFB,  SFBW,  and
Richmond due to the current low interest rate  environment.  Service  charges on
deposit accounts  increased  $39,000 mainly due to adjustments in Home's pricing
and handling of checks returned for  insufficient  funds.  Security  transaction
commissions increased $28,000 due to volume increases in brokerage activities at
SFB and Richmond  and the  introduction  of these  services at Home in the first
quarter  of 1999.  Merchant  services  income  increased  $6,000  due to  volume
increases.  The Company  recognized  $209,000 in investment  securities gains in
first

                                       12
<PAGE>

quarter  1999, a $7,000  increase over first quarter 1998 due to the sale of two
marketable   equity   securities  in  first  quarter  1999.   Offsetting   these
improvements  were  declines in ATM fees and other income in first quarter 1999.
ATM fees declined  $8,000 in first quarter 1999 due to slightly  lower volume in
foreign transactions at the Company's terminals. Other income decreased $46,000,
mainly  due to lower  amounts  realized  from  other  real  estate  sales  gains
($33,000), fewer check imprinting fees ($21,000).


Other Expenses

       Total other expenses  increased  $67,000 in first quarter 1999 over first
quarter 1998, which included  $598,000 in merger-related  charges  recognized in
first quarter 1999 resulting from the  dissolution of Home's ESOP.  Exclusive of
these  merger-related  charges,  total other expenses decreased $531,000 or 7.8%
due mainly to lower costs for personnel,  professional  fees,  advertising,  and
credit card processing  expenses.  Personnel  costs decreased  $402,000 or 12.0%
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 incurring  approximately  $125,000 in additional personnel expense
in first  quarter 1999 due to the addition of LCC and four  additional  FTE's at
Home hired to introduce commercial and consumer lending to Home's markets. Legal
and professional  fees declined  $157,000 due to efficiencies  realized from the
Home  merger and  reduced  legal  costs on  collection  activities.  Advertising
expense  decreased  $51,000,  all of  which  was  due to  adjustment  to  Home's
marketing  budget  post-merger.  Other  expenses  decreased  $46,000  due to the
Company no longer  incurring  credit card  processing fees in first quarter 1999
due to the sale of the credit card  portfolio in third  quarter 1998, as well as
reduced office supply costs in first quarter 1999. Offsetting the aforementioned
improvements in total other expenses were increased expenses for data processing
($57,000),  goodwill amortization ($37,000),  occupancy and equipment ($23,000),
and merchant  services  ($9,000).  Data processing and merchant services expense
both increased due to rate adjustments from the Company's service providers. The
increases in goodwill  amortization  and occupancy  and equipment  expenses were
related to the Company  including  LCC's operating  results in its  consolidated
1999 operating performance.

Income Taxes

       Income taxes for the quarter ended March 31, 1999 increased $303,000 on a
$380,000  increase in income before income taxes. As previously  described,  the
Company incurred $598,000 in merger-related  charges in first quarter 1999 which
were not  tax-deductible.  Excluding the merger-related  charges,  income before
income taxes increased $978,000, resulting in an effective tax rate of 34.2% for
the first quarter of 1999  compared to 35.5% for the first quarter of 1998.  The
lower  effective  tax rate in 1999  was  primarily  related  to an  increase  in
tax-exempt  investment security and loan income as compared to the first quarter
of 1998.


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 $92,490,000
and $82,230,000 at March 31, 1999 and December 31, 1998, respectively.


Year 2000 Problem

       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.


                                       13
<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 that are not  effectively  reprogrammed.  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 substantially  completed the first two phases of the plan
and is currently working internally and with external vendors on the final three
phases.  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 convert to the Company's  data
services provider in May, 1999 and July, 1999, respectively.

       The Company's  other  external  vendors have surveyed  their  programs to
inventory the  necessary  changes and have continue  correcting  the  applicable
computer  programs and  replacing  equipment so that the  Company's  information
systems will be Year 2000  compliant  prior to March 31,  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 is installing a new wide area network connecting
all of its 16 offices.  The Company expects to complete the  installation of the
wide area network in the middle of May and will test it for Year 2000  readiness
and compatibility with its other systems immediately following installation. The
Company expects to finish a substantial portion of its Year 2000 testing by June
30, 1999.

       The  Company  has 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 will result in additional  direct and indirect  costs to the
Company. Based upon current internal studies, as well as recently solicited bids
from various computer hardware and software vendors,  the Company estimates that
the total  direct  cost of  resolving  the Year  2000  Problem  will not  exceed
$900,000.  This estimate includes  approximately  $471,100 in hardware purchases
that the Company  expects to  capitalize.  To date,  the  Company  has  incurred
approximately $400,000 in costs related to addressing the Year 2000 Problem. The
majority of the  remaining  costs related to resolving the Year 2000 Problem are
expected to be incurred in 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 

                                       14
<PAGE>

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 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 March 31,  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> 
Tier 1 leverage                   125,216       15.0%     33,301      4.0%      41,627        5.0%

Tier 1 risk-based capital         125,216       23.6%     21,200      4.0%      31,800        6.0%

Risk-based capital                129,828       24.5%     42,400      8.0%      53,000       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.

                                       15
<PAGE>



Part II. Other Information

Item 1.   Legal Proceedings

       As of March 31, 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

           None


                                       16
<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

       On March 1,  1999,  the  Company  filed Form 8-K  Amendment  No. 1 to its
report on Form 8-K filed on December 30, 1999 in regards to its merger with Home
Bancorp of Elgin, Inc. and its subsidiaries.

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








                                       17


<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: May 12, 1999        

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



Date: May 12, 1999        
                                   By  /s/ Michael A. Reindl            
                                      Michael A. Reindl
                                      Senior Vice President, Controller, and
                                      Chief Financial Officer