State Financial Services Corporation

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State Financial Services Corporation

10708 West Janesville Road
Hales Corners, Wisconsin 53130
U.S.A.
Telephone: (414) 425-1600
Fax: (414) 425-4231
Web site: http://www.statefinancialbank.com

Public Company
Incorporated: 1910 as State Bank, Hales Coners
Employees: 440
Total Assets: $86.5 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: SFSW
NAIC: 522110 Commercial Banking

State Financial Services Corporation is the holding company for State Financial Bank, a growing bank centered in southeastern Wisconsin and reaching into northern Illinois. The bank began by serving the small community of Hales Corners, Wisconsin, and grew through acquisitions, particularly in the late 1990s, into a leading regional financial service provider. State Financial Services has close to 30 branches, offering traditional banking products such as checking and savings accounts as well as home mortgages and commercial loans. The bank also offers trust services and asset management and provides insurance through its subsidiary, State Financial Insurance Agency. Shares in the bank are publicly traded on the NASDAQ exchange.

Early Years in Hales Corners

The town of Hales Corners was founded in 1837 by Seneca Hale, who came to the area from New York. The town was located on an important crossroads for westward pioneers and for people traveling to and from nearby Milwaukee. Though supported mostly by farming, the town boasted a prominent hotel and a mill, was served by a wide plank road, and was a commercial center for outlying areas. The State Bank of Hales Corners was founded in 1910, but at least twenty years before that it operated in a rudimentary manner. In the 1880s, a local businessman, James Smith, ran a real estate and loan office on Hales Corners’Forest Home Avenue. Smith built a vault into the stone wall of his office and offered casual banking services to area farmers. Farmers brought their cash to Smith, carrying it in milk pails, and Smith stowed it safely in his office vault. Apparently, Smith did no formal bookkeeping. When his customers needed cash, they asked for a withdrawal, and Smith went to the safe and got the money out. Smith died sometime in the late 1890s, and his office was taken over in 1898 by the Hales Corners’school teacher, James Godsell. Godsell continued to sell real estate, offer loans, and act as a bank; he sold insurance as well. The bank operated in this informal way until 1910. That year, Godsell went into partnership with John Meade, who had run the hardware store next door to Godsell’s office. They applied for a state charter for the bank, which became State Bank, Hales Corners, on July 20, 1910. The four officers of the new corporation were Godsell and his wife and Meade and his wife. Later Godsell’s daughter became the bank’s cashier, the first woman in Wisconsin to hold such a position. Though the bank had operated in what seems by today’s standards a slap-dash manner, when it incorporated in 1910 it had very respectable assets of $20,000.

During the Great Depression, the bank was hard hit. It had to close for four days in 1932, declaring a special holiday, to prevent a run on deposits which would have forced it out of business. Seven hundred depositors met to work out the fate of the bank. Several community businessmen pooled assets and brought in $38,500, enough to keep the bank from going under. State Bank was then led by Rudolph Holz, who also ran the Hales Corners Chevrolet dealership. Holz was president of the bank through 1972, and his descendent Jerome Holz remains chairman of State Financial Services Corporation’s board.

The bank moved out of Godsell’s tiny office into its own building in 1910, and it stayed in that location until 1960. That year, it moved into bigger quarters across the street. The original bank was left standing and was still in use by another Hales Corners business in the early 2000s. State Bank opened its first branch in 1968 in nearby Muskego. State Bank was the only bank in Hales Corners until 1970. Through the early 1980s, it still had only the one branch, and it remained very much the prototypical small-town bank.

A Changing Landscape in the 1980s

The suburbs of Milwaukee expanded to run up against Hales Corners, and by the early 1980s it was no longer the isolated little town it had been. Larger banks in the area began competing for customers, yet State Bank of Hales Corners in many cases had an edge. The bank got a new president in 1983, Michael Falbo, who had previously been a vice-president at Marine Bank in Milwaukee. Falbo’s plan was to maintain roots in the community, while growing the bank moderately through acquisitions. State Bank prided itself on customer service, doing face-to-face business where larger competitors would have to refer loan decisions, for example, through layers of distant management. Holz family members maintained voting control of the bank’s board through the 1980s, and local control and doing business with the local community were important to the bank. But State Bank began to make strategic acquisitions in the 1980s, expanding into neighboring areas.

In 1984, Michael Falbo became president and CEO of State Financial Services Corporation, which was set up as a holding company for State Bank of Hales Corners, which then became known as State Financial Bank. Falbo was in his early thirties when he became president of the company. He had served in Vietnam as a combat medic, where a harrowing tour of duty gave him valuable lessons in “how you handle situations,” according to an interview with the Business Journal-Milwaukee (April 30, 1990). Falbo seemed prepared to move the bank beyond its smalltown roots, while preserving State Financial from being snapped up itself by consolidating banks in bigger cities. In 1985, the company bought a Milwaukee bank, University National Bank. Two years later, the company made another acquisition, taking over Edgewood Bank in nearby Greenfield, Wisconsin. State Financial began offering its own credit card soon after, finding it was able to offer a more competitive rate to its customers than larger area banks. And it opened more branches, expanding University National Bank into three new locations. The company had a record year in 1989, with net income growing to $1.6 million, compared to $709,000 a year earlier. By 1989, the holding company had assets of $165 million, and 130 employees. In 1990, the company issued stock to the public for the first time, debuting on the NASDAQ exchange. The $2.5 million stock offering was intended to bring the company capital to fund more acquisitions.

Rapid Growth in the Late 1990s

State Financial made more acquisitions of small banks in Wisconsin in the mid-1990s, and by 1997 the company had grown to about $400 million in assets. The bank was still small compared to many banks in the region, and Falbo told the Milwaukee Journal-Sentinel (April 18, 1999) that State Financial had received numerous offers to merge with other banks, some in Wisconsin, some from outside the state. State Financial’s share price went up sharply, evidently because shareholders expected the bank to be bought for a premium price. But that did not happen. Instead, the bank’s board turned down all merger offers and went after more acquisitions itself, doubling the bank’s size in the late 1990s.

One of its most significant deals was the company’s acquisition of Richmond Bancorp Inc., of Richmond, Illinois, in late 1997. State Financial Services Corp. had never crossed the border into Illinois before, though the Richmond bank was only a fifteen-minute drive from State Financial’s branch in Burlington, Wisconsin. State Financial paid $10.7 million for the bank, which had two branches and assets of $90 million. The Richmond bank also had an insurance subsidiary. A bank’s ownership of an insurance company had previously been illegal, but laws changed in the 1990s, loosening many of the regulations that had compartmentalized financial services. State Financial took over Richmond’s insurance office, making it a separately managed entity of the holding company, incorporated as the State Financial Insurance Group.

Next the company acquired a La Crosse, Wisconsin-based asset management firm called Lokken, Chesnut and Cape. This move in 1998 again expanded the company’s role in the financial services market. From being a traditional bank focused mainly on consumer and small business accounts, State Financial now also ran an insurance subsidiary and the asset management company. Then at the end of 1998 State Financial made another large investment, spending $125 million to acquire Home Bancorp of Elgin, Illinois. This was the company’s largest acquisition yet, and it doubled the bank’s size. Home Bancorp had around $370 million in assets, and it put State Financial’s total assets close to $1 billion. Home Bancorp also had a savings and loan subsidiary, Home Federal, with five locations. State Financial’s stock price fell as it bought Home Bancorp, with some investors apparently believing the price of the new acquisition was too high. But a banking industry analyst quoted in the Business Journal-Milwaukee (June 12, 1998) described the acquisition this way: “They bought the savings and loan from ’It’s a Wonderful Life,’and now they can offer a world of new services to those customers who previously had very limited choices,” referring to the popular Christmas-time movie about a small town bank. The new owner kept the savings and loan charter and the name Home Federal, while in 1999 it combined the names and charters of its other banks, giving it 16 branches of State Financial Bank. That year State Financial also made another Illinois acquisition, paying $28 million for First Waukegan Corp. This deal brought State Financial’s assets over the $1 billion mark for the first time.

Company Perspectives:

At State Financial Services Corporation our mission is to be the premier provider of financial services to consumers and businesses, providing a wide range of financial options in the markets we serve. We have positioned ourselves as a one-stop, full-service provider of financial products and services rooted in the tradition of community banking and attentive individualized service. Through our office network, our customers have direct access to professionals to meet their banking, insurance, brokerage, and asset management needs.

First Waukegan Corp. had assets of $212 million, and it was a major purchase, coming on the heels of the acquisition of Home Bancorp. The bank’s stock price languished, as investors were apparently skeptical of the bank’s ability to integrate all its new business. The bank also had an efficiency ratio which was rather high compared to competitors. The efficiency ratio is a key measure of a bank’s performance, showing how much the bank spends for each dollar of revenue. In 1999, State Financiar’s efficiency ratio was near 70 percent, meaning it spent 70 cents for every dollar it brought in. The national average for commercial banks for the period was just over 60, and some high-performing banks had efficiency ratios in the 40s. CEO Falbo vowed to cut costs and bring the efficiency ratio down. Net income at the bank was also up and down during its period of rapid growth. Profit in 1997, as the buying spree began, was over $7 million, an increase of over 50 percent from the year previous. Net income dropped to $1.2 million for 1998, rebounded to $7.4 the next year, and settled at around $3 million for 2000. The bank’s assets had grown solidly between 1995 and 2000, beginning at under $300 million and reaching $1.1 billion by 2000. By 2001, the bank had 23 branches, and it had invested heavily in information technology to link the branches and consolidate operations. It moved all its deposit operations into one Wisconsin location, which was expected to add to the bank’s efficiency, and it took other steps to reduce costs throughout its network. The bank continued to build branches and to acquire as well, buying LB Bancorp, holding company for Milwaukee’s Liberty Bank, in July 2001, for $12 million.

Nevertheless, State Financial’s stock price remained low, and earnings did not improve as fast as management would have liked. By mid-2001, the company’s stock price was still around $12 a share, while it had been close to $30 at its peak in 1998. State Financial significantly underperformed the NASDAQ Bank Index. State Financial also had to give up its asset management subsidiary, Lokken Chesnut and Cape, in 2001. The firm had never been profitable for the company, and disagreements with Lokken Chesnut’s employees and founding partners meant that many customers took their accounts elsewhere. An industry analyst quoted in the Milwaukee Journal-Sentinel (August 5, 2001) called the dissolution of the partnership with Lokken Chesnut “an expensive lesson.” State Financial took a $2 million charge against its fourth-quarter earnings to dissolve the relationship. And the bank had to take another $2 million charge at the same time, to write off bad loans that had been made without authority by an employee who later left the firm.

State Financial Bank created a new position of president, chief operating officer, and director in 2002, hiring a man with experience in both banking and in management of a small business to take the post. Michael Falbo remained president and CEO of the holding company, and he admitted in an interview with the Business Journal-Milwaukee (January 25, 2002) that the bank needed work on integrating all its new business.“Some things that came on board were not high-performing, and at this point we’re not a high-performing bank,”Falbo said. But the company was committed to turning this situation around. The bank had changed drastically since the early 1980s, transforming itself from a small-town bank to a relatively large regional player offering a wide variety of financial services. By 2002, management seemed determined to do its best to keep State Financial Services competitive and get the best out of its many recent acquisitions.